”That which does not kill me makes me stronger”…

The above quotation comes from the Maxims and Arrows section of Nietzsche’s 1888 tract “The Twilight of the Idols, or How to Philosophize with a Hammer” (sic). To state that Nietzsche’s views were and still are controversial is an understatement; and he remains anathema in many quarters.

However, as is often the case, it is instructive to look beyond the trite, sensationalized level, and consider what the statement is trying to convey. Interestingly, the phrase which precedes it is usually forgotten: “From Life’s School of War…”

Nietzsche was trying to convey that in the real world (rather than the “apparent” world, which he mocked), life is a struggle and one will face risks and setbacks, but that if one survives one will emerge stronger and more robust. It is a form of resilience.

It should be axiomatic that any (re)insurer must be based fundamentally on a resilient business model, because the very function of the entity is to be able to withstand shocks that damage and destroy the assets or resources it is covering and still be able to meet all its claims and obligations as they arise or fall due.

And yet, resilience has to be based upon the realities of this world, not some expectation that “it will be all right on the night”. This requires constant vigilance to detect new risks, or changes in the nature or scope of risks. One still contentious area would, for example, be the impact of climate change on what can and should be considered insurable. It is frankly absurd that so many governments still permit building in areas at known risk of periodic flooding (as distinct from truly rare, catastrophic events).

Consider also, the burgeoning area of cyber risk covers- as we have written before, one of the “next big things”- seen by many in the industry as a way in which both to increase premium flows and to improve underwriting margins. While events surrounding the recent US elections have highlighted the potential non-monetary consequences of cyber attacks, and one would think that any self-respecting senior executive would be paranoid about the risk to his or her own business, a recent Lloyd’s survey of senior European executives showed a continuing disconnect between the fact that 92% of respondents had experienced a breach within the past 5 years, yet only 42% professed to be concerned about the risk of a future breach. Is that denial, or cognitive dissonance?

Conversely, it would appear that underwriters are still struggling to model the risks posed by writing such covers, with one specialist being quoted recently by the Financial Times as saying: “It’s a struggle trying to model risks where there isn’t 100+ years of data.” So, if one struggles to model the risk, how robust can the resulting model be; how confident can one be that it has identified the extent of the “tail”; and how realistic is the pricing?

Of course, we are not saying that providing such covers is foolish per se; rather that the industry needs to be very careful that it does not create another “death spiral” resulting from claims that far exceed the abilities of the market to absorb them.

At Awbury, we aim to diversify the underlying nature of the risks we write; to write only those which we can model and price effectively; and always to be in the situation in which, even if the worst case occurs, our financial capacity and integrity will not and cannot be compromised.

And finally, consider Maxim and Arrows’ aphorism #44: “The formula of my happiness: a Yes, a No, a straight line, a goal.” Quite relevant for the start of a new year.

Of course, not long afterwards, Nietzsche went literally insane…

The Awbury Team

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