A cloud-castle of sweet illusions and darling lies…

While it may sound like an echo of Aristophanes’ play “The Clouds” or even “The Birds”, the above quotation actually comes from what is considered a key staring point in the modern study of ethics, entitled “The Ethics of Belief” by Professor W K Clifford, published some 140 years ago. Of course, the seminal work of Western philosophy in this area is Aristotle’s ‘Nicomachean Ethics’, but that is focused more on what constitutes the “good life”. Here we are concerned with modes of thought, rather than actions.

While a full reading of this mid-Victorian era essay would probably cause disquiet in terms of some of the examples used, that should not detract from the author’s underlying purpose of teasing out why and how it is unethical and, indeed, harmful to one’s self and to others to be credulous in what one believes- something which seems increasingly relevant in a world of “truthiness” and even “post-truth”, where “false news” (rather an oxymoron) allegedly abounds.

We all know that the truth has consequences; but so does its opposite, as we have witnessed on more than one important occasion during 2016. It is, therefore, critical if one is to be able to make effective and ethical decisions to have the capacity to distinguish between the two. Perhaps ironically in the circumstances, “Trust, but verify” takes on new meaning.

While, as we have written before, “one has to start somewhere” and that it is rational to regard some matters as being “reasonably certain” (for example, that the sun will rise tomorrow), many factors are, in reality, not directly verifiable, or are probabilistic. The question of ethics becomes relevant because decisions and actions also have consequences: what is it right or reasonable to believe based upon the evidence available, and what are the actions or decisions that appropriately flow from that belief? What are the likely consequences? If one’s actions or decisions ignore the evidence then, according to Clifford, one is acting unethically.

The world of finance is often a target of those seeking to land a seemingly easy blow; but in our view it is more important to distinguish between those who willfully choose to be blind to worrisome signals and thus harm not only themselves but also those dependent upon their decisions and actions, and those who raise often uncomfortable questions and chose to pursue a sometimes difficult quest. The former eventually suffer opprobrium and often oblivion, while the latter are eventually rewarded for their perseverance and integrity.

And another phrase from Clifford’s essay seems particularly apt as to how one should determine “the truth”: that it should stand “in the fierce light of free and fearless questioning”; while the truth is “desecrated when given to unproved and unquestioned statements for the solace and private pleasure of the believer”. At Awbury, we are very much of the belief that we must challenge assumptions and verify data if we are to operate successfully; and we are, frankly, concerned that it may seem acceptable to distort and misrepresent facts, as well as the behaviours and beliefs of others. We are very much believers in the rigorous pursuit of the right outcome, even if that may be long, hard process.

While we believe strongly in the profit motive and that generating wealth for ourselves and our partners, while adding value to our clients’ risk management needs, is both moral and ethical, we remain adamant that it must be done with the proper alignment of interests, which is reinforced by being straightforward and ethical in how we conduct ourselves.

And on that note, may we wish all our clients, partners and advisors the compliments of the season!

The Awbury Team

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The world of ABMs…

No, dear Reader, we are not referring to the MAD world of Dr. Strangeglove and anti-ballistic missiles (ABMs), but to the origins and concept of Agent-Based Models (also ABMs). The former are irredeemably destructive; the latter the basis for much of modern forecasting and risk assessment.

As regular readers will know, we pay attention to the work of Andrew Haldane, Chief Economist of the Bank of England- a man who is something of an iconoclast, as well as a skillful disseminator of ideas. So, we read with interest a speech he gave recently entitled “The dappled world”. The title is a reference to the work of a philosopher of science, Professor Nancy Cartwright, in which she made the point that the so-called “natural sciences” are in reality the product of a “patchwork of theory and evidence” (rather than some wonderful idealized Platonic form.)

Now, one would think that this would be considered “a statement of the obvious”. The world is a messy place, and even some “iron laws” of, say, physics are not quite a rigid as one might think- compare the Newtonian world with that of quantum mechanics. As Haldane points out, CERN’s huge and complex Large Hadron Collider is “in essence, a massive Monte Carlo machine”. If we throw spaghetti against the wall in sufficient quantities and frequently enough, the probabilities are that at some point we will think we see a pattern!

And you might be surprised where and how ideas from elsewhere can infiltrate economic and financial theory and practice. The (in)famous Black-Scholes Formula for options pricing had at least part of its origins in the heat transfer equation in physics: Haldane describes it as a “genetic mutation”.

However, the key question in all this is: “What works?” Economic models and theories are all very well, but they lead remarkably often to failure in terms of outcomes, with unpleasant consequences for those who are impacted. Of course, having no model or frame of reference can be as bad as having one that is flawed. One has to start somewhere; otherwise we would run the risk of not being able to decide upon anything by suffering from intellectual paralysis.

And that brings us back to ABMs. Somewhat ironically, these grew out of the work of Enrico Fermi at the Los Alamos National Laboratory during the Manhattan Project, when he was trying to calculate how to model the chain reactions of fissioning atoms when helping to design the first atomic bomb. In time, this work led to less destructive applications across an ever-increasing array of industries including finance, where the uses of random numbers and of “agents” who are both heterogeneous and interactive are now fundamental to the models built to predict outcomes and scenarios. In another delicious irony for the realm of (re)insurance, Monte Carlo simulations, of course, take their name from the eponymous Casino.

So, what has all this to do with Awbury? While the Team aims to operate in a cohesive and effective manner, and has, in the 5 years in which we have been in operation, developed a recognizable “culture”, it is in reality a group of individuals whose views can certainly be considered heterodox, because we are very well aware of the dangers of “groupthink”. Yet, at the same time, we know that to make sense of and structure the opportunities we have it is essential to build and use effective models if we are to make judgements and decisions that are realistic in risk/reward terms. Yes, the world is messy and human beings can do remarkably stupid things judged objectively, but that is the reality; there are limits and constraints; experience matters; and, as long as one avoids being captivated by the beauty of the models one has built, one has a reasonable chance of making an executable and profitable decision- something on which our partners rely.

In truth, we all live in a world of ABMs- of both varieties.

The Awbury Team

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Now we are 5…

No, we have not reverted to our childhoods and to counting on our fingers, dear Reader! Rather, the Awbury Group has now reached a robust and bumptious 5.

And in that eventful 5 years, the Golden Tree has grown from a seedling to a strapping sapling. It has been caressed by zephyrs and withstood storms, becoming stronger and more resilient than ever. We expect it to continue to grow and increase its span, because we are focused on building a sustainable Awbury franchise across our E-CAT (Economic and Financial Catastrophe Risk Insurance) domain.

So, we would like to take this opportunity to thank all of our clients, reinsurance partners and advisors who believed in our concept and business plan, and who have supported the Awbury Team in its implementation over the past 5 years. In all seriousness, we could not have achieved what we have without you.

In addition, we would like to express our appreciation to our regulators. We are very cognizant of the fact that we operate within a regulated environment, which requires mutual trust and respect.

While Awbury was conceived in the wake of the Great Financial Crisis, and one could be forgiven for wondering “when will it end?” in light of the continuation of slower growth, distorted asset prices and the dislocating effects of regulation, let alone “Brexit” and the outcome of the recent US elections, in reality we believe that the future holds much promise for a business such as ours, as the economy evolves, and new centres of financial and transactional activity emerge. All this will require new insurance products and risk solutions, which are Awbury’s focus and specialty.

Why? Human nature and ingenuity have proved, so far, able to address and manage repeated shocks, some of them potentially existential. However, progress is never smooth nor linear; but tends to come in bursts and even contain regressions. This means that, to survive and prosper, one needs to remain fully aware of one’s environment and the factors that can threaten survival, while also being open to opportunities as they present themselves. We may be millions of years away from the East African savannah, but many of our instincts and subliminal influences remain.

Therefore, as we have written before, the Awbury Team pays great attention to underwriting the opportunities presented to us in a way that ensures that we minimize the risks of “groupthink” and “framing”, which can mean that insufficient weight is attributed to the tail risks that are inherent in our E-CAT franchise. As the Great Financial Crisis and recent events have demonstrated, in the area of geo-political, economic and credit risks, the tails are often somewhat “fatter” than models predict; or models, being stylized and the product of insufficiently robust inputs, simply fail to account for what happens in the real world.

Furthermore, we are somewhat obsessive about ensuring that, in everything we do, there is a proper alignment of interests and appropriate allocation of the economic risks and rewards. We achieve this by focusing on business where we can add value and provide solutions for our clients, eschewing situations that are commoditized or “standard”. We are most assuredly, not the “dumb money”! We will simply walk away from anything that hints of that.

Of course, we are not so naïve nor smug as to believe that we are infallible. We have a healthy respect for the view that “only the paranoid survive”; and are always testing our assumptions and beliefs to ensure that we are not caught out by changes in our environment.

So, in conclusion, we are grateful for whatever success the past 5 years have brought us; and will be judicious and proactive in making sure that we maintain our momentum and growth.

The Awbury Team

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