A Quantum of Solace…?

It appears that a number of the largest US commercial and investment banks (such as Citi, JP Morgan and Goldman Sachs) as well as European banks (such as Barclays and BBVA)  are ramping up their research into the potential applications of so-called quantum computing (a derivative of Quantum Theory’s articulation of superposition and quantum entanglement, amongst other exotica)- a technology which, if it can be tamed and harnessed, promises to revolutionize many areas of business and finance which depend upon the swift analysis and computation of huge datasets.

Because of its architecture, quantum computing may make the power of modern “supercomputers” seem to be from the days of ENIAC (in the 1940s), opening up the possibility of designing and applying algorithms and models currently beyond the dreams of all but the best-funded entities.

Not surprisingly, banks are exploring “use cases” for quantum computing, the most obvious of which is in risk management, where the speed and power of the technology will significantly enhance their ability to analyze probabilistic outcomes, not only more quickly, but also more broadly, giving a boost to the long-standing Monte Carlo simulation and C-VaR methodologies. Other areas include speeding up the Machine Learning systems that underlie Artificial Intelligence (AI). Of course, banks are hardly alone in investigating what quantum computing might do. We would be shocked if the largest hedge funds and alternative asset managers were not also undertaking or commissioning their own research. When market advantage can be measured in microseconds or less, anything that can speed up analysis and execution, or examine and process a wider range of data is enticing.

That said, no financial institution has yet publicly stated (perhaps for reasons of maintaining an understandable discretion) that it is beyond the initial research phase, (although IBM claims to be testing quantum algorithms for pricing of European options and portfolio optimization) and there is continuing debate over the extent to which and when a stable and reliable quantum computer will be constructed.

Turning to the (re)insurance industry, there are a number of similar “use cases” that can be identified, such as in the area of modelling complex, unstable systems such as weather and climate, or in enhancing actuarial models to enable more accurate pricing and risk selection. Sompo International has already stated that it is examining the potential application of quantum computing in a world driven by 5G communications technology.

However, as well as the benefits, (re)insurers should be aware (as banks are) of the threats posed by quantum computing in the area of data security and transfer. Data are currently primarily secured by so-called “prime number encryption”, which remains effective because of the time-prohibitive nature of computing all possible combinations. With quantum or qubit systems, their ability to assess factor combinations very quickly would render prime number encryption obsolete. Not only that, but the properties of quantum entanglement apparently open up the possibility of intercepting quantum information in transit without detection- which would be the worst nightmare of any institution tasked with maintaining confidentiality.

As yet no-one really knows, or is admitting to when appropriately-scaled and reliable qubit computing will make its debut (and one can be sure that state actors will want to keep their capabilities hidden). Nevertheless, at Awbury, we believe in being aware of technological developments, so that we can constantly assess and update our own risk analyses. We may not seek quantum supremacy, but we do aim for quantum understanding.

The Awbury Team


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