Ordo et Chaos

Our industry exists to provide the means to protect our societies, businesses and individuals against risks that they are unable or unwilling to bear themselves, so that they can focus on being productive and fulfil their goals.

As such, it seeks to price and spread the risk of loss rationally, taking into account all relevant factors; and controlling for and excluding those risks which cannot properly be measured or quantified, because there comes a point at which no single business, or even the (re)insurance industry as whole has sufficient capital to bear certain risks- nuclear explosion being the most obvious such example.

A whole sub-sector, natCAT, has been built upon the assumption that one can predict and price so-called catastrophe risks with sufficient accuracy that the premia collected and capital accumulated will, over time, exceed the losses paid out. However, it may be that many often forget the true meaning of the word “catastrophe”: in the original Greek, καταστροφή, it means an overturning, or a sudden end- often of the established order. Chaos follows.

It may seem trite, but one could argue that we have become almost inured to the true meaning of the word, because it has become a term of art, with a quantifiable outcome- and there is a price for that. Yet, to paraphrase Oscar Wilde, it is entirely possible to know the price of everything and the value of nothing; and the traditional natCat sector is having to struggle within an environment in which the downward pressure on pricing remains relentless, with little sign of respite. It is a paradox that all the so-called “catastrophes” that are declared are, as yet, still not sufficiently “catastrophic” individually or cumulatively to arrest or reverse this trend, and senior executives continue to lament the prevalence of the dreaded “soft market”, the surfeit of capital, and the continuing rise of alternative sources from investors desperate to escape from the world of low coupons and returns inflicted by central bank monetary policies.

In such a world, a true catastrophe would almost certainly wipe out decades of returns, and take down more than a few capacity providers, with risk managers and CROs lamenting the fact that their models were flawed. We have seen that movie before!

So, one would think that a rational business manager would seek out revenue streams that are not suffering “soft markets”; where the risks are not correlated to any material extent with natCAT; and where it remains possible to write business on a value-added rather than “loss plus” basis, with well-controlled limits and attractive returns on capital and risk. That is the domain in which the Awbury Group operates- our franchise is built upon providing our clients with bespoke tools to manage their credit, financial and economic risks; and our many partners with premium flow that remains well-insulated from the afflictions of the traditional natCat markets.

We seek to price for risks where it remains possible to maintain order and avoid succumbing to catastrophe and chaos.

The Awbury Team

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Trust in me…

At Awbury, some of us are of sufficient vintage to remember the original Walt Disney film of Kipling’s “The Jungle Book” and the song “Trust in Me…”. What you may well ask, do the machinations of a psychotic python have to do with the world of Awbury?

While it may seem trite, the song’s title raises a point which is, in fact, fundamental to commerce and (re)insurance- the importance of trust and co-operation.

One can debate whether competition and a laissez-faire approach to economic management are superior to alternative models in which there are mechanisms to curb the extreme and harmful outcomes that untrammeled and unregulated markets periodically impose on so-called market economies, and whether it is possible to design a perfect system of contractual obligations, such that businesses become able to run themselves without human intervention. However, in the real world, the proper and most effective conduct of business is based upon trust and the co-operation of all parties involved, not coercion or unbridled competition.

When I negotiate with you in good faith, I do so because I make the assumption, based upon experience, that, while we may have different needs, ultimately the best outcome for each of us is the one in which both parties believe that they have been treated fairly. We may be “competitors”, but a zero-sum approach to our negotiation is, in fact, a “mug’s game”.

While there has been little academic work published on co-operation in recent years, a paper entitled “The evolutionary advantage of cooperation” by Peters and Adamou, in which co-operation involves risk pooling and risk sharing, both classic concepts within (re)insurance, concluded that such co-operation benefits all participants in the long run- and one cannot have co-operation without trust!

Our clients and partners know that, at Awbury, a fundamental tenet of our approach to building and maintaining our business franchise is ensuring the alignment of interests of all the parties to a transaction, because this an important signaling mechanism that aims to ensure, to the extent possible, that the parties will behave rationally; and reduces the risk of a scenario in which one party believes it can act without consideration of the interests of the others, or without negative consequences for acting in bad faith.

Of course, we do not believe that competition per se is a bad thing, nor are we naïve enough to think that we live in a world in which everyone acts at all times with full ex ante consideration of the consequence of his or her actions on others. Self-interest is always a powerful motivator. However, as the classic Prisoner’s Dilemma amply demonstrates, acting purely selfishly and without trust in others tends to end badly for all concerned.

It is also worth bearing in mind that individuals or groups who are able to co-operate successfully tend to be more effective in competing against those who lack that ability, or who consider trust and co-operation a sign of weakness.

So, when we say that you should trust us, it is not an idle or deceptive statement. We are very serious. Trust and co-operation are effective ways in which to create value and better outcomes- for ourselves, our clients and our partners.

The Awbury Team

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