Government-Induced Recession, Interdependence, and Disciplined Pragmatism:

By now we suspect many, if not most, (re) insurance executives are suffering from emotional “whiplash”, as one hitherto unthinkable movement after another occurs within markets and countries, while (for those whose companies are publicly-quoted) gazing in disbelief at how a sudden change in sentiment can trash a share price, even for fundamentally sound businesses.

Consider the paradox that, in essence, most governments whose populations are affected by the Covid-19 pandemic are deliberately inducing a recession in their economy through mandated lockdowns, business closures and quarantine actions. Yet, at the same time, they and their central banks are further increasing their levels of borrowing and inflating their balance sheets to counter the consequences of their own decisions.

The State (Leviathan), where it is still functional, is re-asserting its dominance, even if the terms of many “rescue” measures are skewed to favour certain sectors or business sizes. That is not to denigrate the politicians, who are faced with a crisis we are sure none of them ever contemplated or imagined; but we shall be living with the second order (and beyond) effects and unintended consequences for some time, unless the pandemic is considered under control in fairly short order, and such measures prove unnecessary and can be curtailed or revoked. The old saw used to be: “A billion here, a billion there, now you’re talking real money!” No one can substitute T for B, at least in the US.

What is also becoming increasingly clear is that, to function most effectively, the global economy must remain open. The crisis has demonstrated how economies are interdependent, as well as exposed to  hitherto hidden or overlooked “choke points”. Yet, one consequence of what is happening is that many governments will decide that they must increase domestic self-sufficiency to the extent possible. This is rational as a protective measure, but the slope to autarky is a dangerous one; and the consequences for many could be a regression in terms of economic output and efficiencies. Ricardo’s theory of comparative advantage is going to be re-examined and tested. We doubt it will be found wanting.

Events reinforce the need for rigorous statistical analysis of data; careful assessment of facts; an understanding of interdependencies; the ability to assign realistic parameters to probabilities; and an understanding of individual and societal psychology. Intellectual laziness, or an unwillingness to face the realities of the situation and adjust accordingly, will destroy hitherto “safe” businesses. Ostriches will become an endangered species.

Of course, the ability of models to predict the severity, or to anticipate the source of disruption is often severely limited. They are a guide or means to construct a framework, and must be treated as such. Therefore, the business approach must be based on resiliency to extreme shocks of outsized magnitude and of unknown nature; not on the ability to withstand narrowly-described scenarios.

The pandemic demonstrates that, as human beings and societies, we are all in this together- even observing “social (or physical)-distancing” is a co-operative act. Covid-19 respects neither borders, nor wealth, nor position. Maintaining cohesion and effectiveness, based upon a shared set of values; open communication; and robust systems and processes are essential to survive and ultimately prosper when the crisis abates, as it surely will.

And one final thought- as one City grandee put it: “When the plague broke out in Athens, it enabled Sparta, which was more disciplined, to become dominant”. No prizes for who plays which role in current times. There are few, if any, certainties in geopolitics, but Thucydides must be smiling.

To be very clear, at Awbury we remain fully operational; and remain ready and able to meet our Insureds’ and clients’ needs; and to answer any and all questions.

The Awbury Team

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