So, what are we missing or ignoring…?

It is all too easy in this time of obsessive focus on the epidemiological and economic consequences of the Covid-19 pandemic to think that not much else is material in term of risks to be concerned about.

While, as result of the ways in which governments, agencies, businesses and individuals decided to act, the consequences of the pandemic, in economic terms are, in many ways, without precedent in terms of the speed,  sudden depth and breadth of their impact, it would be somewhat foolish to assume that all the other risks which existed prior to its appearance have decided to go on furlough.

We are reminded of a quotation by Thomas Schelling, a game theorist and nuclear strategist: “There is a tendency in our planning to confuse the familiar with the improbable. The contingency we have not considered seriously looks strange; what looks strange is thought improbable; what is improbable need not be considered seriously.”

Less than 3 months ago, Covid-19 would have been considered “improbable”; now it is familiar with a vengeance. Similarly, for (re)insurers, the idea of retroactive legislation intended to compel them to pay claims which they had even specifically excluded from the wording of a policy would have seemed ludicrous. Not now. So, are the previously “familiar” risks now “improbable”? Hardly.

Like a magician’s sleight of hand or misdirection of attention in order to perform a trick or illusion, the fact that attention has been diverted enhances the possibility that underwriters, CROs and risk managers will miss the obvious, or be misdirected down probability “rabbit holes”, and thus suffer “unexpected” claims, that are nothing of the sort.

As we have written before, it is the risk that you don’t see which is the one you should really worry about.

Of course it matters what the R0 (R naught) number or the true mortality rate of Covid-19 is, or how protracted the pandemic will be before it is contained, or at least becomes manageable; or what the likely rates of business failure are by industry or in the aggregate. However, the frequency of earthquakes or severity of hurricanes are not correlated with those outcomes; while geopolitical risks may well be exacerbated; and just because there is one coronavirus wreaking havoc and focusing attention does not mean that other endemic diseases have become less virulent- in fact, in a physically weakened or economically poorer population they may flare up even more at a time when government resources are already stretched or overwhelmed.

In such circumstances, a continuing and continuous healthy paranoia is warranted; because ignoring or downplaying other risks can be equally as fatal, if not more so,  than the current pandemic. One does not want a weakened corporate immune system to focus on one target, only to be surprised by others that hide within its shadow.

At Awbury, our focus is, of course, on credit, financial and economic risks; but that does not mean that we are indifferent or oblivious to the second and third order impacts of other contingencies or risks. Our institutionalized paranoia is in full force! We always wonder and think about what we might be missing. The improbable has the habit of becoming all too real.

The Awbury Team

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