Roads to Ruin: major corporate failures beyond the scope of risk management

I confess that I haven’t read the full report (it runs to 200 pages) but, between the report itself (link below) and the CII summary document, the message sounds eerily familiar to the voices that have been going round in my head for the last few years!!! Don’t be afraid I am not a threat!

buiding-collapseMuch of what the voices were telling me resulted from extensive research into the nature of complex systems that was prompted by the “genius” of Dr Jacek Marczyk (Founder & CTO at Ontonix). Much of what I have learnt and sought to bring to the attention of those engaged with mitigating and managing risk in insurance (and wider Financial Services) has, unsurprisingly, found its way into the pages of this very blog, numerous Linkedin Group and “real world” discussions.

Whilst my “journey” has been intellectually rewarding the same cannot be said in financial terms!

My experience is such that I don’t expect that there will be rapid and sweeping change as a result of this report. Although, bearing in mind the nature of the risk management “weaknesses” and given what we know about the societal cost of major Corporate failure, it would be perfectly reasonable to ask: why not?

It isn’t as if there haven’t been warnings. This is an extract from a report into systemic risk, prepared during 2006:

Two particularly illuminating questions about priorities in risk management emerge from the report. First, how much money is spent on studying systemic risk as compared with that spent on conventional risk management in individual firms? Second, how expensive is a systemic-risk event to a national or global economy (examples being the stock market crash of 1987, or the turmoil of 1998 associated with the Russian loan default, and the subsequent collapse of the hedge fund Long-Term Capital Management)? The answer to the first question is “comparatively very little”; to the second, “hugely expensive”.

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Knowledge Economy: business as PART OF (not apart from) community

I you are at all “read” in the broad subject of complexity you may already be aware of the established links between: information – learning – intelligence – complexity – innovation. If not, this recent article from Wall Street Journal, about  a report, The Atlas of Economic Complexity may be of interest.

But elements of this blog item (apart from a useful infographic) really struck home and I wanted to share it. We have had the usual ham-fisted attempt by Politicians to promote the “Big Society” as if, by sticking a label on it, they could lay claim to a successful strategy…or blame citizens and society if/when it doesn’t work as hoped! In truth, whilst the “spirit” is sound, when delivered by Government against a backdrop of Austerity, it sounded and smelt like more “top down” BS!

I’ve been looking at ways to explain why social learning is so important for business today. It comes down to the fact that what we know and do inside our organizations is insufficient to address external complexity or to be innovative

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How can “entrepreneurial spirit” and "creative destruction" flourish without nourishment?

Joseph Schumpeter reinterpreted (from Marx economic theory) and popularised the expression “creative destruction” to describe the process by which established ways of doing things are destroyed from within (by new thinking, tools and processes) – at this point the scientific community may draw attention to the 2nd Law of Thermodynamics: that a system tends toward entropy (chaos or disorganisation) and consider the state of our global economy.

Hugely expensive and experimental life support for “clinically dead” institutions, markets, currencies and flawed philosophies equates to – at best – stagnation and at worst starves innovators of the means to accelerate a new evolutionary phase: instead of “creative destruction” we have “destructive creation” in the form of more regulation! Read more of this post

Warren Buffett urges more insurance underwriting discipline…

Is this just another opportunity for UK insurers to determine that such warnings, obviously, DON’T apply to them!?

“At bottom, a sound insurance operation requires four disciplines:

(1) An understanding of all exposures that might cause a policy to incur losses

(2) A conservative evaluation of the likelihood of any exposure actually causing a loss and the probable cost if it does

(3) The setting of a premium that will deliver a profit, on average, after both prospective loss costs and operating expenses are covered

(4) The willingness to walk away if the appropriate premium can’t be obtained,”

the letter states. “Many insurers pass the first three tests and flunk the fourth. The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. ‘The other guy is doing it so we must as well’ spells trouble in any business, but none more so than insurance.”

via Warren Buffett Urges More Insurance Underwriting Discipline, Fewer “Testosterone-Driven” Decisions.

This is a much bigger issue than even WB appreciates

When “the Oracle” speaks he tends to worth listening to and this pearl is no different. However, the dire warnings of, such as PwC and Citi have previously been ignored and there is little evidence to suggest that this is about to change! Have insurers (and the wider industry) failed to learn anything from their (rightly) vilified “cousins” in banking?

Do they not realise that, whilst Banking institutions were deemed TBTF (see below), insurers most certainly are not.

I wrote, recently, about the differing views of insurance and systemic risk on the two sides of the Atlantic. For my money the UK view is dangerously naive and has little basis in evidence. The precarious state of global FS and the, tightly-coupled, national economies that rely upon them, are such that the failure of an insurer or, for example, a major consolidator in the broking sector, could trigger a new financial collapse.

As we know from recent economic history, systemic risk in FS moves at lightning pace. BUT, when (not if) the impact of a new and avoidable crisis cascades into social and cultural domains  – adding to the existing financial burden WE are having to live – this could prove to be the “death knell” for FS greed-mongers and inept Political Klepocrats.

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Is the "fire" taking hold in the Arab world? Tunisian “burning man revolution” a lesson in Complexity Theory

For obvious reasons this and other blogs that talk about the threat of contagion and systemic risk have focussed, almost exclusively, upon financial and ecological inter-connectedness.

HOWEVER, once again we see a “pattern from nature” in these Geo-Political events. The institutional model is and will continue to be under extreme pressure to change as it is the vehicle of the “elites” and in uncertain or turbulent economic times scrutiny and criticism will only increase. Only those that are “structurally resilient” can withstand the heat of a fire that started in Tunisia with a spark and is gathering in intensity as it spreads through peoples inter-connected on numerous levels. People unified by a common purpose…to bring about a cultural paradigm shift.

I would urge you to read: “Disaster myopia”: Failing to learn the lessons of increased uncertainty

A Fruit seller, whose cart was impounded, and complaints ignored, by authorities, set himself on fire in a desperate act of protest. His actions have since been mirrored across the Arab World. Egypt, Syria, Jordan, Saudi Arabia and Iran. This is a measure of how disenfranchised the citizens of these countries feel. Whether fuelled by Political or Religious oppression, an increasing gulf between the “have’s” and the “have not’s”, corruption, crumbling infrastructure, a lack of jobs or food the message is the same. The “elites” who preside over institutions that have given them power Read more of this post