The Best Capital Allocating Underwriter…

The Best Capital Allocating Underwriter…

A certain amount of controversy has recently been stirred up in the realm of investment management by a recent paper written by a team at Bernstein entitled “The Silent Road to Serfdom: Why Passive Investing is Worse than Marxism”. No doubt there is an allusion in there somewhere to von Hayek’s classic tract first published in English in 1944: “The Road to Serfdom”, one of the “foundation documents” of what now pass for “free markets”. In essence, the paper equated passive investing with Marxism.

Matt Levine, a Bloomberg commentator, then wrote an excellent note, entitled: ”Are Index Funds Communist?”, in which he posited the concept of the Best Capital Allocating Robot (BCAR- fancy that!), a robot that will vanquish all other competing robots in the field of allocating capital, leading investors to throw money at it, because no rational person would invest with the second-best robot. Of course, Mr. Levine was careful to state that this was “all nonsense”, because “The market is the best algorithm ever developed for allocating capital. So far!” We all know what happened to an economy “run” by Gosplan, and that the PRC is not really a centrally-planned economy in the true sense, even if the CCP cadres tend to be rather more involved than in a market economy. And even in the Land of the Free and the Home of the Brave, the mortgage market has become a socialist construct (the horror…!)

So, at Awbury, we thought we’d introduce the concept of the Best Capital Allocating Underwriter to the world- a true Mechanical Turk of the (re)insurance industry, to whom questions can be posed, which will be answered “automatically” (and it won’t be aeons to get to “42”.)

Just think of the benefits. No real marginal cost once the creature has been created through machine learning and the mysteries of quantum computing. Negligible running expenses. Not prone to fatigue, nor tantrums. Impervious to brokers’ blandishments, with no interest in the social niceties or Yankees tickets. Guaranteed to give a quick decision once all the inputs have been provided… In truth, a paragon of risk-adjusting and pricing excellence, able to meet attempts to influence decisions with a casual “Make my day!”

Of course, the real world is somewhat messier. As we have written before, there are quite clearly some lines of business that could and should largely be underwritten by dispassionate, self-learning algorithms, given a sufficiently large and diversified pool of Insureds; and perhaps, as data mining, pattern recognition, model construction and machine-learning continue to advance, the number of such lines will expand, while quite clearly the (re)insurance industry as a whole could benefit from a more ruthless approach to expense control.

However, as matters stand, not everything in the world of (re)insurance can be reduced to an algorithm; and we humans still tend to prefer that there is, ultimately, a human agency responsible, even if much or most of a transaction can be conducted without direct human contact or intervention. In particular, true creativity and innovation are two key areas that have not really been touched so far by AI. Yet, the vast majority of the real value in any human endeavour is created by those two activities- and Awbury’s enterprise mission is exactly that: creativity and innovation in the realm of (re)insurance.

So, while we suspect the Best Capital Allocating Underwriter’s shadow will overwhelm an increasing share of the (re)insurance markets, where there is little differentiation and the products are, in reality, fully commoditized, the Awbury Team intends to continue to develop and hone its ability to provide its clients with bespoke, value-added solutions to complex problems (while still maintaining a suitable level of paranoia about the threat horizon!)

The Awbury Team

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