The recent UK budget provided a salutary lesson in the consequences of unforeseen event risk and of being an undiversified “monoline”.

The proposed, radical, “once-in-a-lifetime” changes to the UK’s pensions regime, appear to have completely blind-sided the industry and all the commentators and experts- so, kudos at least to HM Treasury for not giving any hint of the potential carnage beforehand.  Of course, shareholders in specialist annuity providers, Just Retirement and Partnership Assurance (who saw gut-wrenching share price drops of 46% and 61% respectively) are probably not that happy…especially in the face of predictions that the annuity market may reduce by up to 90% (sic).

Event risk is the stuff of risk managers’ nightmares; and we at Awbury try to keep a weather eye out for factors or trends that may affect the risks we structure and underwrite. The number of scenarios in which bad things can happen is vast, but what happened in the UK was an abrupt and extreme version of political risk, in the sense that a party in government made a conscious decision, without prior consultation, to make a radical policy change that will have material consequences on a long-established, if widely disliked industry. Some industries just seem to be more vulnerable to such things- cf. mining, oil & gas, gambling/gaming, energy utilities (German nuclear power anyone?) and, of course, finance (in spite of its supposed cozy relationship with political power).

Therefore, when we underwrite any risk, we try to understand and analyze all the factors that could have a material adverse effect on any of our policies. Some risks are probability based, some are not. It is the latter that cause most concern, for they are difficult, if not impossible to price properly; but every time an event happens (say, BP’s Macondo tragedy, or the UK annuity debacle), we learn more and can factor it in.

The other key lesson from the annuity debacle is that it is dangerous to be dependent upon only one type of revenue stream, especially one that is so closely entwined with public policy issues, because then one becomes vulnerable to a single action severely damaging or even destroying one’s business model. We believe that one of the strengths of Awbury’s business model is that the broad panel of reinsurers which backs us are not only substantial businesses, but also diversified; which significantly reduces the risk and probability of any one event having such an impact as to damage their financial strength and payment capacity.

We are not so foolish as to believe or claim to be omniscient, but we do believe that our seasoned and experienced team is sufficiently knowledgeable and diverse to be able to manage and mitigate appropriately the risks of our FinCAT business.


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