Those who enjoy what is now termed “classic” science-fiction (yes, we are showing our age…!) will almost certainly, at some point, have come across and read Isaac Asimov’s legendary Foundation Trilogy, the first book of which was published in 1951 (altho’ its origins date back to the early 1940s).
The Trilogy is based on the premise that, through an understanding and mastery of “psychohistory” (a combination of history, psychology and mathematical statistics), it is possible to predict the future behaviours of large groups of people- i.e., societies; and Asimov portrays the collapse and re-configuration of a galactic empire as the result of human behaviours (with some plot twists along the way!)
Interestingly, since then, the real discipline of “cliodynamics” has gradually been developed (see, for example, Peter Turchin’s book “War and Peace and War”)- a transdisciplinary area of research integrating historical macrosociology, cultural and social evolution, economic history/cliometrics, mathematical modeling of long-term social processes, and the construction and analysis of historical databases. While not trying to claim significant predictive powers, nevertheless, cliodynamics does aim to understand why and how societies and empires rise and fall, and to illustrate that the sweep of recorded human history exhibits a recurring series of nested cycles of behaviours and outcomes.
“What (you may say) does any of this have to do with (re)insurance?”
Anyone who underwrites credit and related risks (as the Awbury team does), cannot do so in some isolated, self-contained and purely quantitative manner. Experience teaches that, while predictive models have a use at scale and over time (providing they have reasonable assumptions and recognized constraints), context and qualitative or behavioural influences also matter greatly.
In terms of underwriting a short term, idiosyncratic risk, one might argue that an understanding of history and human nature may not add much value. Yet, on a longer-term, portfolio basis such knowledge can be extremely useful, as it can help illuminate potential trends and outcomes, and so prepare the underwriter or risk manager to recognize a shift in the nature of the underlying risk..
Of course, one must not be so foolish as to believe that “this time it is not different”, or vice versa. There are always nuances, and previously unknown or non-existent factors in what are complex, and soften unstable systems. Nevertheless, as Mark Twain said: “History doesn’t repeat itself but it often rhymes”.
Human beings tend to exhibit patterns of behaviour that, in a given set of circumstances, are largely predictable, whether the result of internalized beliefs, or in response to external forces. All this helps the suitably-prepared risk underwriter to develop a thesis as to the realistic vulnerabilities which a particular risk, or portfolio may have, and so help avoid or at least mitigate the probability of unexpected and unanticipated outcomes which may lead to losses.
Pyschohistory may have fictitious origins, but cliodynamics is an increasingly rigorous discipline, which becomes another tool to be added to an underwriter’s mental toolkit.
The Awbury Team