The Peace of Westphalia and European colonialism, have a lot to answer for; having reinforced the concept of the “nation state”, while in the case of European colonialism, creating some arbitrary and nonsensical “countries” which most assuredly were not, nor are, “nations”.
This thought came to us in light of the furore over the Crimean secessionist referendum; the pending Scottish referendum; continuing unease between Catalonia and the Spanish polity; and the potential resurgence of Quebec separatism as a potent political force within federal Canada. Of course, the sorry recent history of South Sudan and the question of Kosovan viability as a truly viable independent state reinforce the point that “self-determination” may be a principle, but its practical outcome can be decidedly unfortunate!
So, why do such events matter to Awbury? We are in the business of structuring and writing “FinCAT” insurance; and we would prefer it if the “tails” in risks we write were definitely “thin” and the risk/reward relationship reasonably predictable. Not for us “fat tails” and nonsensical concerns about the expected standard deviation being demonstrably inadequate for the facts!
All of the above-mentioned examples, create the potential for outcomes that require one to revise one’s view of potential scope, probability and range. They increase risk, which can be priced, but also uncertainty- and it is uncertainty that is the real problem.
For example, there is a game of “cat and mouse” going on between Her Majesty’s Government and the Scottish National Party (SNP) over use of the Pound Sterling; access to the Bank of England; and responsibility for sovereign debt should Scotland achieve true independence as a new (old!) independent state.
No-one seriously believes that the United Kingdom, even if shorn of Scotland, would refuse or be unable to honour the “Scottish portion” of the National Debt should a newly-independent Scotland seek to repudiate its deemed obligations, but the discord and posturing raise the level of uncertainty for an already stressed UK banking system, much of which, for reasons of history or legal quirk, just happens to be domiciled in Scotland. So far, we do not believe that this uncertainty has been priced in; but what if the unexpected does happen and there is a clear vote for independence? One would expect disruption and re-pricing as the implications are quickly factored in.
Therefore, we should all pay attention to the unfolding of events in some seemingly distant and unconnected places. They can produce unpleasant surprises.
-The Awbury Team