Cor Blimey! Brexit…? EU fragmentation?

As readers will know, at Awbury, we like to scan the horizon for risks that may seem remote; but which, if they were realized, could cause significant disruption or losses.

So, we keep an eye on political developments that could have a material impact.

The recent election of Jeremy Corbyn as leader of the UK’s Labour Party is one such event. At 66, Mr. Corbyn is an unredeemed, hard-left Socialist (who approves of Marxism). He is, therefore, the “real thing”, as opposed to what many in North America or elsewhere view as a “socialist”; with some views and “friends” that will quite properly give many pause for thought.

As long as he leads the Labour Party, it is almost certainly unelectable in UK terms; but that is not what concerns us.

Because of somewhat foolish prior undertakings by the ruling Conservative Government, the UK will be having a referendum within the next 2 years (and perhaps as early as 2016) on whether or not the UK should remain a member of the European Union. The last time that question was asked was some 40 years ago, in 1975, when the response was a fairly solid “yes” to staying “in”, although it seems that Mr. Corbyn then voted “no”.

One would have thought that, despite all its faults, most in the UK would see that remaining part of a structure that has brought many economic and personal benefits makes sense; and that the consequences of deliberately leaving would be unpleasant and damaging. However, “most people” thought that the risk and probability of Scotland seceding from the Union was laughable, until it wasn’t.

While Mr. Corbyn has now stated that under his leadership, Labour Party policy would continue to support and campaign for a “Yes” vote in the referendum, nevertheless, apparently, he has also been reported as finding the idea of a sharing a platform with the Government and “big business” distasteful, as they represent odious capitalism. Thus, the message he sends is not unequivocal. Such are the potential consequences of a political leader’s personal views.

Put all this in the context of the fact that the EU currently faces a “triple crisis”: of Euro-fragmentation à la Grecque, managing immigration and xenophobia (with the Schengen system at serious risk), and “Brexit”. Ironically, all the uncertainties and rhetoric that the first two factors engender may have an impact on the probability of the last occurring. Immigration is a contentious political issue in the UK, even though its economy and society have benefited for centuries from successive waves of immigrants and refugees; and, being an island and outside the Schengen system, it has much better control of its borders than elsewhere in the EU; while, as the UK is a not a member of the ERM, it is not constrained by the ECB’s antics. And yet, ultimately, voter preferences and intentions can be influenced by emotions and short-term perceptions.

Much can and will change over the ensuing months within UK politics and EU policies; but, while the risk of “Brexit”, or EU institutional paralysis, or even the beginning of its disintegration remains remote, it is not negligible. Therefore, such risks need to be factored in to any risk-acceptance or -management decisions that could be materially impacted if one or more of these scenarios comes to pass.

The “summer holidays” are definitely over!

The Awbury Team


Would you rather be “stranded” or “virtual”? Discuss

No, we are not setting a question for a philosophy exam- of the sort designed to torture the mind of the poor examinee; and make him or her wonder why on earth studying the subject seemed “a good idea at the time”!

Rather we are alluding to two existential, and related, questions, which we believe will become of increasing importance to all of us. So, Dear Reader, bear with us.

The concept of a “stranded asset” is one that is by now well-understood in the realm of business and risk management; for, example by German power utilities operating nuclear power plants. What were perfectly good and productive assets were rendered essentially worthless (or worse) by political fiat.

Similarly, “virtual reality” is becoming an increasing element of many people’s lives, as technology becomes able to provide individuals with sensory experiences that appear “real”, but are not.

What if, however, we human beings risked becoming “stranded assets” ourselves; or if you could create a “virtual life” that had no physical existence, but appeared to have an impact on society, business and government? Such concepts may appear to be from the realms of science fiction; but they are not.

The topic of Artificial Intelligence (AI) is one that is receiving greater attention, not just in terms of the impact of “Big Data” and the potential obsolescence of certain occupations, but also in terms of the tail risk of AI actually achieving true consciousness. Not surprisingly, visions of The Terminator are being conjured up (“2001: a Space Odyssey” being so “yesteryear”), as well as ones of a networked consciousness, able to replicate and enhance itself in environments in which human beings cannot survive. Of course, no-one really knows whether, when or how such an outcome might occur; and many dismiss it as science-fantasy, the product of paranoid minds. Nevertheless, the rate of development of neural networks; expert systems; and learning algorithms should not be ignored; nor our increasing dependency upon them. One morning, we may wake up and find that we have been superseded.

However, the question of creating a “virtual life” (in the sense of an identity that could be used to fool government bureaucracies and financial institutions in ways that make “identity theft” seem so second-rate), is one that should be of more immediate concern. So much of modern life is conducted without physical interaction, that the potential for deception is, paradoxically, very real. At the latest DefCon hacker-fest, a security researcher named Chris Rock demonstrated that he could create what amounted to a “virtual life”; one that could be made to appear to develop, borrow, trade stocks and then “die” in order to collect life insurance. Given the concurrent ability to create digital avatars, is it really that far-fetched to imagine a “recluse”, seemingly averse to human interaction, being created and manipulated? It gives a whole new meaning to KYC, or Know Your Customer!

After all, DNA is simply a form of code.

So, why should we at Awbury care about such matters? For a very simple reason: in our world of trying to identify, assess and manage complex risks, it is the ones that can seem “implausible”, or “improbable” that often lead to disaster and oblivion; and we have a distinct aversion to the prospect of becoming “stranded”, while believing strongly in the continuing value of real, face-to-face human contact! Being able to discern and connect seemingly disparate or uncorrelated risks can make all the difference between profit and failure.

So, are you sure you are real…? [Which is, of course, the age-old question that does torture the apprentice philosopher!]

The Awbury Team


Monte Carlo- simulating reality?

As (Re)insurance executives contemplate the forthcoming industry get-together (or Bacchanalia?) that is the Monte Carlo Rendez-Vous, it may be time to take stock; and to reflect on some of the themes and trends that are likely to be topics of discussion (or commiseration). None are particularly new, but that does not mean that they should be disregarded.

So, in no particular order, Awbury would respectfully suggest:

– M&A: the catalogue of transactions, both modest and material, consensual and contentious, continues to grow, as realignment within the industry to meet changing perceptions of the strategies needed to survive and thrive shift from “specialization” to “diversification”. And, there appears to be a new player in town- the Chinese quasi-conglomerate seeking to deploy capital and gain influence, some with surprisingly little obvious knowledge of or experience in the industry. Only a fool would underestimate their potential appetite, or resources. And, of course, the Japanese major carriers continue seeking to diversify outside their home markets. So, the guessing game of “who’s next?” will continue. Just beware of those preaching synergy; and check the terms on which your share options vest!

– Capital: it is now a truism that there is a surfeit of capital available from an ever-expanding range of investors seeking supposedly non-correlated returns in a financial landscape distorted by the policy decisions of central banks. Being able to earn appropriate and sustainable risk-adjusted returns is increasingly problematic

– Data: as we have written before, the rise of so-called “Big Data” should enable the industry to analyze and price its risks better; yet at the same time it poses a material threat to current business models, particularly in commoditized product segments. If it isn’t Google, it will be someone else!

– Culture: an intangible; but critical to the ability of any business to survive and compete effectively. Trying forcibly to meld organizations with different cultures usually ends badly, because human beings are remarkably sensitive to such actions. They may appear to conform or accept, but will consciously or unconsciously behave in ways that effectively sabotage performance and destroy value

– Risk: It’s all about the risks. Of course it is. (Re)insurance exists to manage it. However, in the face of larger aggregates; weaker terms; and relatively untested coverages (such as “cyber”), one has to wonder how robust existing ERM systems are

– Regulation: the bane of a many a senior executive’s life; with “compliance” being a true growth industry not just within the benighted banking industry. If it’s not Solvency II (which is currently giving many senior executives waking nightmares!), it will be IAIS, or the Feds, or the NAIC. We do not question the need for oversight and regulation of an industry that has such an impact of economics and human welfare; but we continue to wonder at the ever-increasing complexity and the ultimate purpose of those who aim to impose yet more of it

– Model Behaviour: Of course, everyone is on their best behaviour at the Rendez-Vous… but in a world in which models and algorithms are increasingly dominant, are you sure that a), you have the appropriate models; b) that they are robust and fit-for-purpose; c) that those who created and manage them know what they are doing; and d), that they actually provide you with a competitive advantage and quality risk management, rather than providing a false sense of security?

So, enjoy the rosé and the late summer weather, but try not to lose too much at the Casino…

The Awbury Team



As aficionados of “The Hitchhiker’s Guide to the Galaxy” will recall, “DON’T PANIC!” was the exhortation printed on every copy of the legendary “Guide”; and, yet again, the phrase came to mind as we observed the seemingly overwhelming fear caused in some quarters by “Black Monday 2015”. However, what is a 3-Standard Deviation event, when set against the real Black Monday’s 20-Standard Deviation Event, which we survived, as life went on? And, of course, there had to be “obvious” explanations, with the exact “causation” seemingly dependent upon an individual’s political leanings, or market position.

At Awbury, we try to take the long view; and maintain a dispassionate perspective on what often amounts to “noise”, which masks or obscures the real issues.

So, consider this:

  • It was late August. Many market participants were away; volumes are down; liquidity is less
  • Most commodity markets continue to trend lower
  • There is uncertainty about whether, and when, the Fed will finally raise its policy interest rates
  • Geopolitical tensions are rising in a number of areas
  • Some relatively large economies are is recession- Brazil, Russia
  • What the real state of the Chinese economy is remains opaque, but the CCP is clearly rattled and nervous; and the Chinese domestic share indices were an “accident waiting to happen”

Yes, none of the above factors is exactly helpful; and, cumulatively, they can clearly influence perception and behaviour; but a momentary market seizure is hardly reason to panic when set against a broader perspective.

If one is in the (re)insurance business, do such events really make a difference to the viability of your business model; or to the probability that clients will buy particular coverages? Unlikely, except at the margin. Your share price was whipsawed? So what? It happened to most! Perhaps there was some unexpected volatility exhibited in certain components of your investment portfolio? Well, think about how you may be able to dampen or remove that by moving exposures to the liability side of your balance sheet- Awbury has products that can help you do so.

We believe that such “volatility events” are useful, because they force one to re-examine assumptions and avoid complacency; and to question whether one might have missed something in a risk analysis. No self-respecting risk manager should ignore what happened on August 24th; and, quite clearly, there are macro-economic factors that should engender caution. However, trying to parse what happened and seek its “meaning” in isolation is pointless. Such events are almost invariably symptoms, not causes- and it is the causes that matter. Events in China were at least a catalyst; but we would be much more concerned about the impact of economic slowdown, political in-fighting, policy paralysis and credit de-leveraging in the PRC, than about the gyration of its stock exchange indices.

So, in short: “Keep Calm and Carry On”. The world has not come to an end just yet…

The Awbury Team