To catastrophize or not to catastrophize, that is the question…

We hope, dear Reader, that you survived 2020 relatively unscathed, if perhaps a little emotionally-exhausted! To say that the year just passed was one for the record books is an understatement.

Perhaps (re)insurers should choose R.E.M’s “It’s the end of the World”, or Rainer Maria’s “Catastrophe” (opening lines: “All the dams will give at the end, at the end, at the end of the world”) as their ironic theme song? After all, it is human to be fascinated by catastrophes, as long as they do not happen to you, or, as in the case of a NatCAT underwriter, they do not mean that you suffer a claim!

Of course, the word catastrophe itself comes directly from Ancient Greek (καταστροφή); and originally meant simply a sudden turning, or overturning- a reversal in fortune- beginning to acquire its current meaning in English (of some form of disaster) in the Sixteenth Century.

One could argue that its original meaning is equally useful in the sense that, for a NatCAT underwriter, the true catastrophe occurs when his or her underwriting model proves inadequate and its expected parameters are overwhelmed by a truly unforeseen event.

Human beings are, paradoxically, notoriously prone to “catastrophizing”- imagining that an event is, or will be, far worse in terms of its consequences than it is ever likely to be- and such behaviour is often a symptom of anxiety or depression. This begs the question of what exactly should be the temperament of a risk manager charged with avoiding the risk of ruin, particularly in the midst of a global pandemic!

As is often the case, we would argue that a rational, middle way is required. Following the approach of Dr. Pangloss in Voltaire’s satire Candide (that all is for the best in this best of all possible worlds) is irrational and very likely to lead swiftly to ruin; yet the reverse outlook based upon emotion is equally foolish. Instead, one should balance the need to rely upon often complex models, and to accept that they are only an approximation of “reality”, with the understanding of what the potential boundaries are of the risk being analyzed and assessed. Even catastrophes usually have limits, and, if they do not should one even be accepting them into a portfolio? After all, not only the pandemic, but numerous other events have shown that catastrophes happen much more frequently than we are often prepared to accept.

Consider, for example, the recent SolarWinds hack, almost certainly an example of state-sponsored action. If such an act can penetrate even supposedly “hardened” and sophisticated defences, where can a cyber-risk underwriter drawn the line in terms of coverage if no-one is truly safe? In such circumstances, imagining “beyond the worst” is actually rational, as the boundaries have shifted yet again in terms of reach and scale. At what point does the supposedly insurable become uninsurable?

At Awbury, we are strong believers in avoiding catastrophizing, while recognizing that we cannot foresee all eventualities. So, we focus on ensuring that the risks we underwrite and accept are truly bounded; with a highly remote, and carefully mitigated, probability of ever exceeding our models’ parameters.

We most certainly do not wish a catastrophe to turn into a tragedy!

The Awbury Team

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