Exit, Voice and Loyalty…

The title for this post is that of a book published some 50 years ago by economist/social scientist Albert (born Otto Albert) Hirschman, in which he explained the alternatives available to individuals who believe they have been let down, overlooked or otherwise mistreated:

– You can leave (“Exit”)
– You can speak up and try to effect a change (“Voice”); or
– You can decide do stay and put up with what is happening (“Loyalty”).

Of course, option two, has a more extreme version- Rebellion.

Now you may say; “But this is simply a statement of the blindingly obvious!”

It is.

However, the stated alternatives are also central components of organizational theory, and of corporate and institutional governance. They tend not to be given much conscious thought, precisely because they seem so obvious. Yet, a deeper understanding of how organizations (from governments, to businesses, to religions) either manage or ignore the three alternatives, and the consequences of doing so, is warranted.

In basic economic theory, Exit is seen as the most effective way of enforcing discipline- consumers do not buy, employees leave, shareholders sell, emigrants leave. It is unequivocal and direct. Hirschman acknowledged this, but argued that allowing individuals to exercise Voice was what underpinned the viability of an organization, and, in fact, concepts such as civil society. Voice creates reciprocity and also Loyalty. He posited that enabling and acting upon Voice was what give a deteriorating entity the chance of what he termed “recuperation”. Without it, Exit or Rebellion would likely ensue, with unfortunate consequences for all concerned. In effect, he was arguing for the effectiveness of an evolutionary approach, over revolution; although he understood that sometimes Voice would fail because of circumstances- such as increasing autocracy, or the presence of an “imperial” CEO. It is interesting to observe that the (re)insurance industry has not been immune to this tendency.

The interesting thing about Loyalty (which is generally seen as a “good thing”) is that, in reality, it can have a very dark side. If one thinks of a corporation, it is merely a collection of individuals who, at a particular point in time, are applying their skills, talents and time towards a particular goal. Properly managed, corporations are very effective at wealth generation, as well as providing their employees with a livelihood and purpose. It is when that loyalty is taken for granted, or manipulated or abused, that things start to unravel. Because human beings are social animals, and generally reluctant to be seen as dissenting from the “collective view”, they can be manipulated into acts which are against not only their self-interest, but that of the corporation and society as a whole. Examples are too numerous to count. The wise and perceptive leave; the gullible and weak stay. As a result, what can appear to be a modest problem, can suddenly become an existential one. Exit becomes disintegration; Voice becomes disruption or Rebellion. No-one benefits.

So, from the point of view of corporate governance, there is real value in being able to balance the weight given to each of the three elements appropriately to maximize an organization’s effectiveness. Failure to do so amounts to willful blindness. Unfortunately, one often wonders whether corporate governance “experts” or Boards truly think deeply, or are even aware of what we have described. We hope they are- in a systematic, rather than casual way.

The Awbury Team

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It ain’t necessarily so…

As underwriters, it is all too easy for our thought processes to become rather “hard-wired” or linear; because, through passage of time and accumulation of experience and knowledge, we begin to assume that we “know the answers”, or that our predictive abilities are more accurate than they actually are.

While, quite clearly, there are parameters and boundaries around many outcomes, or, given a sufficiently large portfolio, one can take a stochastic approach (again within a likely range), there is always the risk of a surprise or significant outlier.

As human beings, we operate as prediction engines in literally everything we do. Our brains can only function through the veil of our sensory perceptions. Nothing is direct, or un-mediated. Naturally, this creates issues that extend into all areas of our lives, including that of trying to make predictions and decisions as an underwriter- and there is no escaping that. After all, each of us “sees” a different reality, because our minds are physically isolated- we are not the Borg!

Of course, as human beings, we have developed very sophisticated verbal and symbolic communication systems, although our ability still to misunderstand each other or miscommunicate is remarkable! After all, where would lawyers be if the meaning of a specific wording was always absolutely clear and unarguable?

So, underwriters (like everyone else) are always dealing with problems of ambiguity and uncertainty- and even when they are “100% sure” they are often wrong.

Neuroscience is beginning to provide some tentative explanations of what is going within our “wetware” (or brains). For a start, as mentioned above, we are prediction engines. It is how we function. In that sense, the brain is Bayesian, always updating what it believes it knows with further observations or inputs. In that sense, when an underwriter assigns a probability to an outcome, he or she is simply performing explicitly what the brain does implicitly.

However, there is a potential and interesting “wrinkle” to this: that, in processing and updating its “knowledge”, the brain may often “privilege” what it already knows versus the additional information it subsequently receives- in other words, assigning a greater weight to its existing knowledge. Quite clearly, this could cause conflict, or cognitive dissonance. It is easier to follow the well-worn paths than to try to create new ones.

The consequences of this would be that our prior expectations sculpt how data are processed and weighted in forming conclusions or taking action. In essence, because our brains have a view on how they expect things to turn out, they can have an unrecognized bias in terms of predicting future outcomes.

One can see the risks of this, as amply demonstrated by the continuing consequences of the pandemic.

At Awbury, one of our institutional defence mechanisms against bias or complacency is always to ask ourselves: “But what if we are wrong? How extreme an outcome is feasible?”

We find that it definitely helps to be intellectually humble, rather than assuming that what we expect is what will happen.

The Awbury Team

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Calibrating Risk…

It is axiomatic that the business of (re)insurance is all about understanding risk, and being able to analyze, price, structure and manage it in such a way as to be able to meet any and all valid claims as and when they are made.

So, one would think that establishing what a company’s appetite for risk actually is would be fairly straightforward. In reality, it is not, because it is practically impossible to establish a comprehensive framework simply through the creation of a set of rules. Rules and limits are merely the starting point.

Paradoxically, an over-emphasis on “risk management” can even increase the potential for an entity to accept risks that are beyond the level it should be willing to take because of the “not seeing the wood for the trees” bias. Any CRO worth the title will be aware that it is identifying the possible aggregations and unexpected links which is the problem, even if one has established a carefully layered set of individual risk limits.

All of this stems from the fact that the real world is not just complicated, but complex- and it is the complexity that creates the issues. One can try to “corral” the complicated within a reasonably sophisticated rules-based system; but complexity resists such an approach, such that rules can engender a dangerous complacency that an entity’s risks have all been defined and “boxed”.

One area in which ignoring complexity can cause real problems is in terms of whether risks behave in a linear way. In a complicated system linearity governs; in a complex one a tiny change can have a massive impact (the butterfly wing effect). After all, events such as hurricanes are not linear in their consequences, even though the scale used gives that impression. A Category 5 is much more destructive than a Category 4.

Similarly, one can de-compose a complicated system into its component structural parts, but in complex systems the components interact with and influence each other in unexpected ways, making it difficult, if not impossible, to calibrate all potential outcomes. Of course, many systems have boundaries defined by natural laws in terms of scale, but in other areas, such as frequency, the boundaries are much less defined, if at all- just consider the current North Atlantic hurricane season and the frequency of “named” storms. Yes, a more active season was forecast, but we doubt that anyone foresaw just how active that meant.

Complicated systems are also usually controllable, whereas complex systems are not, exhibiting so-called emergence tendencies. Trying to act upon them can have disproportionate and unintended consequences.

Any seasoned CAT modeler will riposte: “But we know all this!” And that is true. However, that does not mean that one can calibrate with any real certainty what the true scale of the risks of loss are. The charts that one sees in annual reports are estimates, not limits, and, as we have seen over the past few years, the trend in frequency and scale of natural catastrophes is increasing, which begs the question of whether the risks are truly “controllable”.

At Awbury, we recognize that we are always operating within a complex system, which evolves and changes, sometimes rapidly. No fixed set of rules or limits would be able to cope with such a dynamic environment. Therefore, successful organizations must have risk management systems that are also dynamic and adaptive.

The Awbury Team

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CEO Survivorship Bias…

Within the US and elsewhere, for the past several decades there has existed what can only be called the “Cult of the CEO”. This has been reflected in the disproportionate way in which their compensation packages have diverged from those of lesser mortals as well the often undue deference paid to their statements and public musings, let alone what may happen within the confines of the businesses which they run. Of course, there are exceptionally-talented individuals, who demonstrably add value and make a difference. No doubt each of us involved in the realm of finance and (re)insurance has a view on that- and we are not going to “name names” here.

However, each and every one of them is merely mortal, with individual flaws and biases just like the rest of Humanity. The characteristics of successful CEOs, and how they are identified and selected, has its own sub-discipline within the study of behavioural corporate finance, so we read with interest a recent paper by Marius Guenzel (Wharton) and Ulrike Malmendier (UC Berkeley) entitled “The Life Cycle of a CEO Career”.

Wrapped within the academic prose are some interesting insights into the real world of CEO advancement, selection and firing.

Firstly, and quite logically, as in many other areas of business and finance, there is an inherent survivorship bias, particularly when it comes to assessing and hiring external candidates. After all, if one has failed in a previous role, one is unlikely to be top of the candidate selection list! Conversely, confident and apparently successful individuals have a distinct advantage. In fact, the paper posits that over-confidence in one’s abilities is actually an advantage at that stage, because a Board or selection committee will not have had the opportunity to observe an individual’s true nature, as it would have done with an internal candidate. It is also well understood (and not just at the CEO level!) that hiring managers have the tendency to hire those with whom they identify, and whom they believe they “understand”.

Secondly, and this would apply to internal candidates as well, the need to be seen to perform can lead to a willingness to take on more risk to try to create leverage to the upside (which is often also influenced by the structure of compensation packages), thus actually increasing the risk of failure in adverse circumstances. Of course, by definition, in the absence of a monopolistic advantage, a business has to accept an element of risk in order to grow and prosper. However, there is the  question of whether the risk-taking is proportionate, or might expose the business to a material risk of ruin. The selection process and its own in-built “skew” may inadvertently increase the risk of future failure, or, at best, underperformance when truly tested. Ironically, it is the individuals who are more self-aware and more humble who may perform better long term.

And finally, when it comes to the firing of an unsuccessful CEO (who is still likely disproportionately to be male- just look at the (re)insurance industry!), the authors find evidence that the more “male” a Board is in terms of its composition, the greater its reluctance to fire “one of its own”.

None of the above is particularly surprising. However, it is useful to see the issues examined in a more rigorous and less anecdotal way. It suggests the need, as always, to distinguish between the truly capable and the clever “bluffers”; and to look at a business’s past performance in context and on a risk-adjusted basis, trying to assess how much it reflects the skills of the CEO.

At Awbury, our whole business model and operational approach is built around deploying a cohesive team, which believes fundamentally in measured, incremental growth. Aiming to “shoot the lights out” is most certainly not of any interest, because, particularly in the (re)insurance business, it is axiomatic that excessive risk taking is, frankly, stupid.

The Awbury Team

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Almost nine years in, and it should still be Day 1…

As Awbury approaches the ninth anniversary of its founding (which, in the wake of the time distortion caused by the pandemic, seems a “lifetime” ago!), it is worth addressing how one can continue to be productive, remain relevant and generate value.

The term “Day 1” has been made famous by Jeff Bezos, founder of Amazon, who, by any definition, has built an extraordinary business since starting Amazon some 25 years ago. In essence, Day 1 is defined as the antithesis of Day 2: “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.”

Day 1 means moving and deciding quickly. It requires constant experimentation and adaptation, running the risk of the failure of a particular idea, and, if necessary, discarding concepts or products which are not, or no longer, fit for purpose. It involves identifying themes and trends, and following, rather than resisting them.

It does not sound that complicated, does it?

Yet, the apparent simplicity often becomes overlooked and overwhelmed as businesses scale and mature, because their managements fail to grasp that:

– Being obsessive about meeting and exceeding clients’ expectations
– Resisting the dead hand of process
– Identifying and responding to external threats; and
– Rapid, targeted decision-making

ensure not only the creation of an effective and valuable business franchise, but also sustain its long-term viability.

Unfortunately, as has long been evident in many industries (including (re)insurance), and has been made evident in the wake of the pandemic, businesses (as represented by their supposed “executives”) tend to slip into a seemingly comfortable “middle age”, when really they have become senescent, deluding themselves that they are still youthful and effective. They may just about earn their cost of capital (in a “good” year) and when the economy is expanding; but their irrelevance is revealed when their fitness and adaptability are tested. Their stasis leads to paralysis, and one begins to hear their “death rattle”, as they flail and grasp at anything that may stave off the end. Nothing lasts forever, but squandering the advantages gained by focusing on the attributes described above amounts to a reckless disregard for the Darwinian framework of any competitive environment. Adapt or die.

Of course, there is always the risk that, when something such as the concept of “Day 1” achieves what amounts to cult status (compare “The Warren Buffett Way”) and becomes “received wisdom” it can become a problem in itself, because no-one questions its premise any more.

At Awbury, we are very well aware of this and the so-called “framing” issues that limit or constrain thinking and exploration. So, we take great pains to avoid believing that one approach will always work. (Re)insurance and the world in general are far too complicated and complex for that. Nevertheless, adopting the approach that it is always Day 1 is a valuable part of our intellectual toolkit.

The Awbury Team

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What a world, or what world…?

There is much debate, not surprisingly, about the ways and extent to which the current pandemic will change people’s behaviour and assumptions. The phrase “the New Normal” is much used, which we find interesting, as one could argue that the world has never been “normal”, because it is ever-changing through processes of what one might term natural, economic and political selection. Normal for whom exactly?

Be that as it may, clearly there will be changes- some of which are already evident, and some of which are still speculation.

For example, the Chinese Communist Party (CCP) in its guise as the government of the PRC has clearly used the “opportunity” of a distracted world, and in particular the internal contradictions of its only serious rival, the US, to increase its control over Hong Kong, pretend that its actions in its “Far West” are to reduce the risk of terrorism, test Indian military and political resolve, and enhance its surveillance and coercive capabilities both internally and externally. That is quite evident. Actions speak. And so, far, there have been few material consequences for PRC.

Elsewhere, new approaches to managing and deploying labour are being widely tested (of necessity), but their final configuration or scope remains unclear, as the true balance of advantage versus the “old ways” is as yet unclear.

The balance of power in the financial markets has clearly shifted. No longer do “bond-market vigilantes” over-awe any but the feeblest central bank; while there is more capital available to be deployed than most investors know what to do with, and savings rates have spiked, at least temporarily. The important question, to which the answer will only be obvious ex post facto, is whether that capital will be invested productively, or wastefully. When major central banks are “hoovering up” their own governments’ bonds (or the Eurozone’s in the case of the ECB) and depressing yields, being able to analyze and price risk adjusted returns will be a distinct competitive advantage, because there really is little, if any, “easy money” to be made.

What is also evident is that politicians are extremely poor allocators of capital. Think of how many trillions of dollars, or the equivalent have been “thrown” at economies almost indiscriminately (and sometimes corruptly given the largesse available), when, reportedly, only tens of billions have been applied to research on vaccines. There is a clear absence of a coordinated Manhattan Project” for vaccine development, no matter what all the rhetoric would have one believe. Of course, the current disorganized “competition” may quickly result in a safe, effective and rapidly deployable vaccine. Let us hope that the capitalist approach to health policy works in this case, while recognizing that the “obvious” approach is often known only with the benefit of hindsight.

As we stated above, “normal” is the wrong term to use for any historical period. The arc of recorded history shows that becoming complacent, or assuming that certain things simply will not happen (even though they clearly can) is an approach which leads to dislocation, and often disaster. Crises occur regularly. They just come in different forms.

Much of the population of the world has been (and in many cases still is) the subject of an economic and social experiment of epic proportions through enforced “lockdowns” of different degrees of severity. That may be feasible once (the shock of the new), but it is highly unlikely that, in the absence of authoritarian repression, the experiment can be conducted at scale repeatedly. Even dictatorships end, because they require the acquiescence of the governed or repressed. At some point, that no longer works.

All this may seem a little abstract, but consider what the world has become and how it may have to adapt in the absence of an effective vaccine.

At Awbury, we work on the assumption that one always has to adjust one’s mental and analytical models in the face of new information. The current situation is simply another example, albeit one with potentially broader implications.

The Awbury Team

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What happens when the music stops…?

As Jim McCormick, of NatWest Markets, recently pointed out in a Financial Times article, in spite of the negative economic impacts of the pandemic to date, credit markets have been remarkably buoyant, with many indices actually positive year-to-date, and borrowing costs for companies perceived as creditworthy falling to very low levels.

The perception is that central bank actions (whether by the Fed, Bank of England, ECB or Bank of Japan) have been the key factor underpinning this outcome. In some senses, this is accurate, as markets perceive that the central banks have significantly widened the scale and scope of their operations and so will continue to “underpin the bid”.

However, while central banks can create liquidity, they cannot fix solvency. After all, eventually debt has to be repaid or re-financed, and that requires a business that has the ability to survive the pandemic and “come out the other side” in a viable (even if changed) form. Only governments can address solvency on an economy-wide basis.

To date, while varying in form, governments have provided support on a hitherto unprecedented scale through subsidies, rebates, deferrals, forgivable loans and outright grants. They can do all this because they can borrow (currently at very low, or even negative interest rates) and have the coercive power of taxation. Of course, that ability to borrow at such low rates is only feasible because of central bank policies and the continuing belief of investors that those same governments will be able (and willing) to honour their obligations when due. If that belief and confidence changes (likely to be tested if inflation eventually returns) governments will face a challenge. Modern Monetary Theory (MMT) posits that government spending can be paid for by the creation of money, with the purpose of taxes being to limit inflation, by controlling the money supply, so spending should not be determined by deficit levels. It may have suddenly become “fashionable”, but its robustness has yet to be tested.

And, as Mr. McCormick quite reasonably points out, what if “fiscal policy fatigue” sets in? Most politicians have short attention spans, little real understanding of economics and markets, and are driven by a desire to be re-elected. If electors’ own attention moves on to a different focus, will fiscal policies be maintained, or adapted to meet new needs, setting to one side the issue of funding all the commitments made? Once what one may call “solvency support” it taken away, or re-directed, then what?

Given the level of uncertainty which still attends the timing and likelihood of the pandemic being brought under control in many large economies, there is an increasing risk that at some point what amounts to a precarious equilibrium (created by central bank expansion of the money supply, ultra-low interest rates and trust in the current system) will come to an end, whether as the result of a change in capacity, or because of policy fatigue, even if economies are not “back to normal” in terms of activity and demand.

While we would not be so foolish as to make specific predictions on a macro-economic scale, it seems to us that at some point there will be a “winnowing” across a range of industries (including (re)insurance), which will separate the “prospering survivors” or beneficiaries of the pandemic from those who are not viable without continuing solvency support and/or a significant and swift rebound in demand for their products. Of course, as specialists in credit, economic and financial risks, our aim is to continue to make appropriate assessments and decisions at the micro level, and ensure the integrity of our existing portfolio and business model, while sourcing new business that will prove robust in the face of all the uncertainty.

Not straightforward in the current circumstances, but one we are confident it is achievable with appropriate caution.

The Awbury Team

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Risk is in the air…

As readers of this blog will appreciate by now, at Awbury we are thoroughly paranoid about properly identifying, understanding and controlling risk in all aspects of our business. To that end, we try to keep an eye on what others may identify as “emerging” risks. Of course, such a task is meant to be part of the job description of any self-respecting CRO (and team). However, much of what one reads still resembles little more than a consensual box-ticking exercise: “We’ve thought about is, so everything is now OK”.

In reality, what tends to happen is that a document is created, and then filed away somewhere; to be brought out, when necessary, as evidence of diligent behaviour.

As such, it is worse than useless, because it provides a false sense of security. And if we have learned nothing else in this world, we know that one should never feel secure when it comes to risk management! The advent and outcomes of the pandemic amply demonstrate that!

Another perennial problem within risk management is what we would term “compartmentalization”, meaning that one can neatly classify risks into discrete categories, and so produce labels to summarize them. Checklists do have a value, as we have written before, and are sometimes essential, as long as they are seen as the start of a process, and not an end in themselves. Unfortunately, labelling can also lead to the problem of “framing”: we have defined the risk, and neatly labelled it, so it must fit, and we now understand it fully. As Wittgenstein said: “The limits of my language stand for the limits of my world”. (Die Grenzen meiner Sprache bedeuten die Grenzen meiner Welt). I have “named” it, so that is what it is.

However, the real world is messy, not neat; and one has to be comfortable with managing disorder and often indeterminate continua of outcomes, and acting accordingly. Interestingly, we suspect that in many organizations this may lead, paradoxically, to decision-paralysis in the face of uncertainty, or, conversely, to precipitate action, because: “We must do something!”

Naturally, we are not saying that any of this is easy. It is not. However, it is possible to be better prepared through constant research, wide reading, and continuing dialogue and discussion, with a view to risk identification, scenario planning and gaining an understanding of the realistic boundaries of risk.

The pandemic has been an object lesson in “real world, real time” risk management and mitigation, because it combines scale, speed, reach and uncertainty with behavioral impacts. It is truly a “messy” and evolving event; and one which cannot simply be categorized and “boxed”. Although it is now possible to create some parameters for cause, effect and consequences, one also has to recognize that believing that one fully “understands” the risks is foolhardy.

So, at Awbury, we constantly update our assessment of the risks which the pandemic poses (as well as of the opportunities it may provide in terms of creating new products for our clients) to ensure that we are prepared to deal with any realistic scenarios as the evolve and appear- hence the paranoia!

The Awbury Team

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What could possibly go wrong…?

Being in the business of helping our clients manage complex credit, economic and financial risks, perhaps not surprisingly we the Awbury Team has a certain necessary fascination with how to understand and analyze the material risks any Obligor faces.

Over time, a number of attempts have been made to provide a systematic classification of such risks, the latest (and most comprehensive of which) is the (Cambridge Taxonomy of Business Risks), which uses what one might call a quasi-Linnaean system involving 6 Primary Classes, 37 Families and 175 (sic) Types.

The results are useful because they provide what one might call a checklist (cf. Dr. Atul Gawande’s “The Checklist Manifesto”) for any risk analyst or underwriter to set against the nature and complexity of the entity she or he is reviewing and assessing.

Of course, it is easy to mock a list that contains 175 Types as being far too complicated to be useful. However, the mere fact of its existence should at least compel an analyst to look at the risks which a business faces holistically, and consider which ones are material; or, if they arose, could potentially lead to failure and default. And bear in mind that many regulators require companies to maintain Risk Registers- which, in reality, are analogous to a basic taxonomy of risk.

The Taxonomy does not weight the risks, because, quite clearly, that (and their relevance) varies from entity to entity. However, the authors do comment that, of the 6 Primary Classes (Financial, Geopolitical, Technology, Environment, Social and Governance), Governance risk is often underestimated; while “Geopolitical risks and possibly Financial, [may be] being overestimated. And, yes, “Infectious Disease” is in there as a Family!

The “art”, therefore, lies in looking at an entity and determining the material risks to which it is subject, particularly the potentially “existential” ones. As the pandemic has brutally demonstrated, the trope “lack of cash (and liquidity) kills companies” has never been more true, even if no business executive is ever likely to have planned for revenues to fall to (perhaps) zero for what was hitherto considered a viable and well-run business.

This just serves to emphasize that it is not the “usual” risks that are likely to cause systemic issues (although they may have an idiosyncratic impact), but rather the ones thought to be out in the tail of any distribution. Perhaps ironically, one could clearly argue that the pandemic was a 1-in-100 year risk which should have been factored into (re)insurer risk models (as it surely will now be!), as other 1-in-200-, 1-in-250- and 1-in-500-year risks habitually are for NatCat programmes. This is not, in any sense, to denigrate the (re)insurance industry, because it was governmental behaviour and actions that caused the most harm in economic and loss-exposure terms, not the disease- in other words, a second- not a first-order effect- and that clearly now belongs in any taxonomy of risk under “Government Action”!

The pandemic also demonstrates the fact that world of risk is not Aristotelian and fixed, but evolves and changes as forces and events act upon it- the SARS-COV-2 pandemic simply being the latest example. Checklists are useful, but only as a guide, not as an expression of the limits of risk. As we have written before, it is usually the risks that you do not foresee that cause the most harm.

The Awbury Team

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Don’t just think about it, apply it (quickly!)…

Since the Industrial Revolution, the rate of growth of the world’s aggregate economic output has been extraordinary (https://ourworldindata.org/grapher/world-gdp-over-the-last-two-millennia), with the slope of the graph going from the almost horizontal to the almost vertical. There are many reasons for this, but a key one has been the increase in productivity, as fundamental scientific discoveries were converted into an iterative series of technological and process applications that enabled capital to be transformed into ever growing wealth, even if often unequally. In essence, most of the world “levelled up”.

As with reasons for growth, there is debate about why productivity varies over time and by geography. And vary it does. As economist Robert Gordon has shown, real US GDP per hour increased from an average of 1.79% per annum between 1870 and 1920, to 2.82% per hour between 1920 and 1970, only to fall back to 1.62% between 1970 and 2014.  A 1% annual variation may not seem much, but, because of the effect of compounding it matters.

And now, in the midst of a pandemic, there is much debate about whether a virtual and distributed workforce will be more or less productive. Frankly, it is too early to tell, as there is anecdotal evidence each way.

However that may be, productivity matters. It is clearly linked in some way to step changes or new directions in scientific knowledge; but pure science (which is undertaken for its own sake) has no economic value unless one does something with it. Knowledge has to be applied. In the supposed “golden age” of productivity, from 1920 to 1970, that was often through the medium of the corporate research laboratory, such as IBM, DuPont, Merck, Xerox PARC, and Bell Labs. Those milieu transformed basic science into technologies or products that have made the world what it is today, and which we now take for granted.

Nevertheless, there is a nagging sense that all is not well. Somehow quantity no longer seems to produce the same quality. Why is much debated, and is too large a subject for a blog post. What matters is somehow finding a better way to convert knowledge into applied intellectual capital. Without that, knowledge is just knowledge.

Consider, for example, the (re)insurance industry. Essential, knowledge-based, full of highly-educated and very smart individuals. And yet…

Somehow the industry is often still slow to incorporate, adapt and apply new knowledge, or to develop effective new products and processes. As a  result, it moves sideways, or improves incrementally at best, and sometimes goes backwards- at least so far as it appears to the outside world. As we have written before, according to a McKinsey study, many companies in the industry actually destroy, rather than create value, barely earning their cost of capital. Now the industry faces numerous challenges, some of which may prove existential if it proves unable to address, manage and mitigate them.

For Awbury, the creation and application of intellectual capital to create value-added products is a fundamental part of our “corporate DNA”. It is what our client base expects and demands. We do not pretend to be “better”, or that knowledge is an end in itself; but we do understand that thinking needs to be transformed into doing, rather than endlessly refined, discussed and debated.

The Awbury Team

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