Faites vos Jeux, Mesdames et Messieurs…

As they assemble for this year’s meeting, one wonders how many of the denizens of that meme called “Davos”, or the World Economic Forum (WEF) actually read its annual “Global Risks Report” (GRR- http://www3.weforum.org/docs/GRR17_Report_web.pdf) given all the other matters which such a group has to deal with such as the quality of the après ski, or whether their entourage will be properly housed.

However, while it is easy to mock such documents as “window-dressing” or merely “worthy”, the GRR still serves as a useful reminder of the world in which we may find ourselves living; as well as, importantly, how people currently perceive and react to it, because perceptions and beliefs drive actions and decisions, even if the benefit of hindsight is a wonderful thing.

The plots on the Probability vs. Impact graph in Figure 3 are interesting as a summary. Perhaps not surprisingly, in a world beset by Kim Jong-Un and Vladimir Putin, “Weapons of Mass Destruction” just about wins the Impact prize from Extreme Weather Events (after all, contemplating Humanity’s self-immolation in terms of probabilities is still rather dispiriting), but the latter is considered by far the most dangerous threat in terms of Probability, which brings up the question of intertemporal responsibilities. Nuclear weapons exist, and no rational actor would consider using them as a “first strike” because of the likely immediate consequences in terms of retaliation; but denial of climate change risks can be contemplated, because the irreversible impacts may not occur for generations. There is a problem of the proper alignment of incentives familiar in the corporate and financial world.

Of course, one of the ironies of “Davos” is that is can reasonably be considered the epitome of the increasingly-discredited, self-referential elite (at least for those not making the cut for the Bilderberg Club) and one may rightly wonder whether any of it matters “in the real world.” The FT’s Alphaville column provided a rather sarcastic comparison of references to particular topics (e.g., Trump or Brexit) in the 2016 GRR versus that for 2017. As foreseeable risks, both Trump and Brexit gained the legendary “nul points” (zero), beloved of the Eurovision Song Contest, in 2016; which rather begs the question of the competence of the more than 750 “experts” who supposedly contribute to the GRR.

Another visual representation worth perusing is Figure 2, “The Evolving Risks Landscape, 2007-2017”, as its illustrates quite vividly how perceptions change. So, for 2008-2010, Asset Price Collapse headed the Likelihood charts, with Extreme Weather Events a parvenu for 2017. Asset Price Collapse was also the “winner” of the Impact assessment from 2007-2010, while Weapons of Mass Destruction has been sneaking up the charts for the past 3 years. Perhaps tellingly, no financial risk makes the Top 5 for 2017 in terms of Impact or Likelihood; it’s the NatCAT and Terrorism underwriters who should be really worried according to the GRR!

Naturally, at Awbury, we take all such “assessments” with a large pinch of salt. Not because they have no value, but because there is no individual accountability or consequence of being wrong. 750 “experts” constitute rather a large herd; and none of them has anything truly at risk if wrong (unless, of course, if Weapons of Mass Destruction proves to be a little too prescient!)

With its focus on credit, financial and economic risks, the close-knit Awbury Team demonstrably has accountability to its partners and clients for its decisions; and with our own capital at risk, we most certainly have “skin in the game”. Quite clearly, we do not ignore non-financial risks, because many of the them have direct financial consequences; and it is perhaps the judgement of the interplay between the financial and non-financial that needs to be emphasized more amongst those who analyze and assess any (re)insurance risk. In homage to John Donne, “No Risk is an Island entire of Itself”.

The Awbury Team

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