Are You Biased, or Just Noisy…?

It is a truism that each of us is prone to cognitive biases in decision-making, and that being aware of this reality is at least one step towards mitigating and managing any potential negative outcomes from distorted judgements.

However, while the topic of bias has been extensively studied, and one can easily find “catalogues” of such biases online, the issue of “noise” in decision-making has been less noticed or explored.

So, the just-published book, “Noise: A Flaw In Human Judgment” (co-authored by Daniel Kahneman, Nobel Prize winner and author of “Thinking Fast and Slow”; Cass Sunstein a lawyer-scholar, also a prolific author; and Olivier Sabony, formerly of McKinsey) is worth consideration, as it is always useful to know more about how and why one’s decision-making process can be improved, and to be made aware of flaws or defects which may not be obvious.

For a start, bias is not the same as noise. The former refers to systematic deviations in judgments or outcomes- i.e., outcomes which all deviate in one direction; the latter to random scatters, or unwanted variability, amounting to a “lottery”. Both defects are potentially harmful and unfair; and cause mistrust, unnecessary costs and losses, and unfairness- one only has to think of justice systems. Noise undermines credibility.

And noise can take more than one form: “occasion noise”, when a decision varies because of a difference in external factors which should have no bearing; and “system noise” in which the same facts systematically produce different outcomes. In the latter context, the authors give an example pertinent to the (re)insurance industry. A large, un-named insurance company, in order to check the quality of its underwriters’ decision-making when setting premium rates, provided them with a series of sample cases to review and judge. Management was shocked to find that the same fact set produced outcomes in which the median rate suggested varied by up to 55%! Apart from the potential reputational risks, if such inconsistency became visible, there would almost certainly be a cost to the company itself in terms of revenues foregone.

Clearly, dampening noise is beneficial in any decision-making process, but that must be achieved without creating unrealistically rigid or complex systems that stultify effective human judgement when it is warranted, or de-humanize those subject to the outcomes.

What the authors suggest amounts to “decision hygiene” (a term which reminds us of Atul Gawande’s “The Checklist Manifesto”)- the use of guidelines, protocols and algorithms (being careful not to introduce covert biases) that provide the decision-maker with a number of easier “sub-judgements” that should help control for both bias and noise. In some cases, aggregating individual judgements can be helpful, as can compiling the views of disparate teams on different aspects of a complex problem- such as the cost/benefit analysis of a potential merger.

At Awbury, we have long been students of the decision-making process. Being able to make and implement decisions in a timely and effective manner is a competitive advantage, as long as one does not succumb to the delusion that one has somehow achieved “perfection”. The realm of (re)insurance will rapidly disabuse you of that!

The Awbury Team

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Demography is Destiny…

The above phrase (attributed to Nineteenth Century French sociologist August Comte) has become rote shorthand for the idea that the direction in size and scale of a country’s population is closely correlated with its longer term economic growth and political power- the idea being, essentially: “More younger bodies good. More older bodies bad” (especially if the overall population is static or shrinking). Historically, population growth was certainly a matter of concern to governments which needed to deploy “hard power” (i.e., trained armies and navies- and, later, air forces- manned by relatively young men) in order to project power.

So, much is being made of the likelihood that the PRC’s population is on the verge of beginning to contract (for the first time since the founding of the state in 1949), with that reality being seen as so politically sensitive that the results of the latest census were delayed (and perhaps pre-emptively “massaged”) before being revealed, and then followed by the government encouraging a “3-child” policy. Policy as irony, given the past! Meanwhile, in the US, the initial results of the latest decennial census indicate that the rate of population growth has fallen to the lowest levels since the Great Depression, with the pandemic also heralding a “baby bust”, rather than “boom”.

Naturally, much hand-wringing has followed.

After all, the “received wisdom” is that, in itself, population stability or decline leads gradually to an erosion of geopolitical influence. Of course, it is much more complicated than that. The fastest growing populations in the world are currently mainly in sub-Saharan Africa, yet most of those countries are politically and economically weak, even failed or failing states, with negligible external power or influence.

In reality, while, eventually, population decline and ageing need to be compensated for by immigration (as a reversal in birth rates is almost invariably not feasible) if a society is not to “fade away” (consider Japan), the modern world offers advanced nations, such as the US and the PRC, many ways in which to maintain and even augment power and influence for an extended period, whether in military technology, or through AI and cyber capabilities, as well as through the “soft power” of culture and the deployment of financial capacity through lending and investment. Stealth, careful targeting, superior and adaptive command and control systems, and leaders who are not “still fighting the last war” are essential to the use of “kinetic force”, rather than the ability to hurl forward waves of ill-trained conscripts- consider the Iran/Iraq war of 1980-88 if you wish for evidence of the futility of that approach.

What really matters is whether governments are able to decide upon and implement a coherent mix of policies that accept the reality of population trends, and adjust for them over time. There are no “quick fixes”. This is one reason why immigration is a topic that constantly roils many a body politic, as the “incumbent” population often responds badly to the idea of simply “importing” more people, even if, objectively, they realize that any state needs at least to maintain the ratio between the productive, wealth-creating segment of its population and those who become net consumers.

This inherent tension in most, if not all societies is not a new theme, being in many ways as old as recorded history. However, those nations which wish to maintain influence and deter aggression are going to have to combine technology with economic and demographic policy in order to do so.

Forget “hand-wringing”; and focus on iterative adaptation to reality.

The Awbury Team

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Ransomware as a Service (RaaS)…

If nothing else, the recent enforced and extended shutdown of the mainline operations of Colonial Pipeline, a key East Coast US oil products pipeline, has highlighted, yet again, that cyber risk is a very real and growing threat, and can have significant direct and indirect impacts if an attack is carefully targeted.

The vulnerability of utilities and infrastructure to cyberattacks has been flagged as an issue for a long time; and was amply demonstrated by a now infamous attack on the Ukraine’s power grid during the winter of 2015, generally attributed to those acting in concert with or at the behest of the Russian government and/or security services. Reportedly, the US and the Russian governments have also deliberately penetrated each other’s electricity grids and installed what one might term “latent” capabilities. The cyberattack on US government departments and agencies in December 2020 (again allegedly involving Russian state-affiliated actors) simply reinforces that this is a continuing struggle- sometimes covert; sometimes, as with the Colonial Pipeline hack, very public

In the tech business realm, where subscription models and “X” as a Service are, quite rationally, all the rage, there is a continuous arms-race between the “black” and “white” hats- one which (re)insurers will be paying nervous attention to, not only in terms of protecting their own data-built and -dependent businesses, but more so in terms of the explicit or “silent” cyber exposures they may have within their policy portfolios. The increasing scale, sophistication and impact of more recent attacks should give pause to anyone who still thinks that the risks are predictable, and so manageable across a large, diversified portfolio. The reach of certain operating and software systems demonstrates that the classic “industry-” or geography-based approach to risk mitigation can prove seriously misguided.

Not only that, but there seems to be an ever-fatter left tail emerging in the risk profile for cyber covers, as hackers target ever larger enterprises, and have the potential to cause greater economic damage, or try to extract larger “ransoms”. As author Misha Glenny, quoting cybersecurity business Bitdefender, pointed out in a recent Financial Times article, registered (i.e., disclosed) ransomware attacks in 2020 were 485% higher than in 2019. Imagine if the rate or scale of “traditional” CAT events increased 5-fold: what would that do to your “standard” risk model? How does one price for a 5-fold increase in frequency within a single accident year, let alone magnitude?

And when “Dark Web” hackers actively advertise their services and aim to recruit “franchisees”, one knows that hacking-for-profit has moved from being a threat that lurked in the shadows, and rarely became public (if the victims were able to suppress disclosure), to a more “mainstream” activity, joining the catalogue of ways in which criminals can make money, or cause mayhem. Frankly, we would not be surprised if “recognized franchises” (think Mafia or Yakuza equivalent) start “offering protection” against being hacked or subject to ransom demands for those who pay a fee for that “service”. In fact, the approach probably already exists!

In this context, it now surely behooves those (re)insurers who write cyber covers (Awbury does not) to fundamentally re-think whether and how they can sufficiently segment their markets and covers to provide capacity and aggregations which they can control, at a price and specification that an Insured is willing to pay. Demand is surely rising (and the Colonial Pipeline hack is proof of the risks) and it will be interesting to see how capacity and pricing respond.

The Awbury Team

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The Vision Thing…

Corporate websites are full of “vision” or “mission” statements. It is something that seems to be expected, and there is nothing wrong with an entity’s founders or Board creating such a statement- after all, it is useful to know why you are doing what you do, and give external parties some idea.

If one creates an entity which is intended to prosper and create value, you have to start with a basic premise as to why it should exist. This helps all those involved know the goal(s), and reduces the scope for misunderstanding and diffusion of purpose. If there is disagreement, the odds of that entity succeeding are greatly reduced.

Of course, having a vision and being “inspired” is all very well, but real value is only created through rigorous execution, which requires an effective mix of strategy and tactics. People will, and should, only subscribe to your vision if they have evidence of it operation and results.

Getting strategy right is often difficult, because one has to move from the theoretical (vision) to effective implementation. Perspiration follows inspiration, and execution is often far harder than anticipated, as the real world is not an ordered and static theoretical construct to which one can easily apply leverage, but a complex adaptive system which has the capability for inflicting endless disappointment and frustration. Plans are supposed to work; money and time are expended, but the outcome is uncertain- the ability to adapt is an essential skill.

So too is communication, whether of targets, timelines, or deliverables. While, as noted, these may need to be adapted, they must be clear. And, there is nothing wrong with them seeming unreasonable. Human beings respond better to stressors (as long as they understand their purpose) than one might suspect, and no organization with a sustainable business model and competitive edge was ever built by taking a leisurely approach! One just has to be able to separate the important from the trivial or redundant (another necessary skill), and be ruthless in prioritization.

It also helps to build a “library” of processes and templates that are able to be combined in ways that are effective, without those involved having constantly to “re-invent the wheel”, thus reducing cognitive load, and providing more time for creative thought and problem-solving (because there will be problems!)

Similarly, decision-making processes need to be fit-for-purpose and actually permit the making of decisions. It is remarkable how many supposedly sophisticated and well-resourced entities are very poor at doing this; which creates a repetitive failure of execution, and frictions which actively retard value creation.

And if you do not have the right mix of knowledge, experience and skills available to create a coherent, high-functioning team, then your “perfect” vision may as well not exist. Even in a world of seemingly ever more prevalent algorithms and automated processes, the quality of your collective intellectual capacity, properly resourced and focused, provides the edge that may well separate success from failure; and help take you from vision to result.

The Awbury Team

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Is (Re)insurance a Truly Scalable Business…?

Over the long term, the P&C (re)insurance business tends to grow its premiums at a rate roughly equivalent to that of GBP in mature, developed markets. After all, Insureds buy insurance because they believe they need it, not because they want it, even though all parties know that a properly-structured (re)insurance programme, or appropriate covers are essential to protecting businesses, livelihoods and financial wellbeing against exogenous shocks.

Of course, from time-to-time, new risks arise (such as cyberattacks), or the perception of risk changes (such as those related to climate). However, it is hard to create new growth models, even if one can create new delivery mechanisms such as ILS or ILW, or tweak claims definitions through innovations such as parametric covers.

And while market pricing goes in cycles, and new “class of” companies arise, historically there is little evidence that (re)insurance in the aggregate is scalable in the way that other industries can be. In fact, it is becoming ever more bifurcated between specialized, niche businesses and those which truly do have individual scale, and the ability (should they wish to) to defend market positions. As matters stand, many (re)insurance businesses struggle to earn their true cost of capital, or even destroy value, rather than create it.

New entrants benefit from an absence of legacy systems and loss reserves, but they are still, generally, competing based upon the same historic business models, but trying to do so “better” or “differently”. Even the new “AI-supported” Lloyd’s Syndicate, Ki, intends to act as a “follow-the-form” underwriter, and is, therefore, dependent upon the business models of existing brokers and carriers.

All this begs the question of whether or not it is feasible to create a new, scalable paradigm that will somehow fundamentally change the industry. Conceptually, it is hard to think of a completely new, “fundamental” product line that would cause potential Insureds to say: “I never knew I would need/want that”, absent the advent externally of a new product or risk. However, It is certainly possible, as the Awbury Team did in creating its business model, and scaling up a completely new business, to find ways to solve problems that potential clients have struggled with because they believe no effective solutions exists, and so displace existing products, create new demand, stimulate growth, and add value. Yet, in most cases, the industry still follows on from the businesses others create, which then give rise to the need to protect against or manage new risks (cyber, or satellite being two that come to mind), or to penetrate markets where the need for protection is still under-served- the so-called “protection gap”. Essential, yes. Original, no. At Awbury, we aim to be both original and essential.

Therefore, unless it can solve existing issues in new ways, for the foreseeable future, the industry will have to focus on finding an edge in its underwriting processes so that it can consistently achieve Combined Ratios well below 100%, and/or continue to reduce and re-design its cost structures if it is to increase its profitability.

The exponential scaling beloved of the venture capital/”tech” nexus remains a distant dream, even a fantasy, although, as indicated above, one should never ignore the potential for a business model being created that somehow that is so effective that it becomes scalable at the expense of the industry as a whole.

The Awbury Team

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Perhaps…

“When all the experts and forecasts agree, something else is going to happen”- Bob Farrell

“Experts say…”. How many times does one hear or read that rote phrase when someone wishes to make a point that they expect to be uncontested, or taken at face value- the so-called appeal to authority. Sometimes the “experts” exist, and sometimes they are even recognized “experts”, yet far too often the designation is partial and self-serving. Being seen as a certain type of “expert” can be quite lucrative these days!

Use of the phrase is responsible for much lazy and ill-thought-through “judgement” in this world.

Of course, we are not in any sense denigrating specific, evidence-based expertise. Our world could not function without it, nor could the (re)insurance industry.

Unfortunately, however, “experts” are often no more expert in their judgement than a coin toss, particularly in the realms of finance and economics, in terms of their predictive abilities, and prone to making grandiloquent statements which sound useful, but mean nothing and have no information value.

As the initial quote implies, expert opinion can be in agreement, and be completely wrong, or misguided. After all, predictions of, say, the next recession are notoriously unreliable; and groupthink is always dangerous; while a premium is placed on being certain, which leads to binary outcomes, and much subsequent explaining of why the expert’s statement was somehow misinterpreted or misunderstood.

As Philip Tetlock, founder of the Good Judgement Project, and a UPenn professor, has repeatedly demonstrated, there is both science and art in becoming a true expert in terms of decision-making and forecasting.

In his book for the general reader, Superforecasting, Professor Tetlock laid out what he sees as the characteristics of a skilled forecaster. It makes interesting reading, and we make no apologies for referring to it as a useful checklist for each of us.

Philosophic outlook:

  • Cautious: Nothing is certain.
  • Humble:Reality is infinitely complex.
  • Nondeterministic:Whatever happens is not meant to be and does not have to happen.

Abilities & thinking styles:

  • Actively open-minded: Beliefs are hypotheses to be tested, not treasures to be protected.
  • Intelligent and knowledgeable, with a “Need for Cognition”: Intellectually curious, enjoy puzzles and mental challenges.
  • Reflective:Introspective and self-critical.
  • Numerate: Comfortable with numbers.

Methods of forecasting:

  • Pragmatic: Not wedded to any idea or agenda.
  • Analytical:Capable of stepping back from the tip-of-your-nose perspective and considering other views.
  • Dragonfly-eyed:Value diverse views and synthesize them into their own.
  • Probabilistic:Judge using many grades of maybe.
  • Thoughtful updaters:When facts change, they change their minds.
  • Good intuitive psychologists: Aware of the value of checking thinking for cognitive and emotional biases.

Work ethic:

  • Growth mindset: Believe it’s possible to get better.
  • Grit:Determined to keep at it however long it takes.

If there is one clear conclusion to be drawn from the above summary it is that being dogmatic and certain is a negative characteristic for anyone who wishes to have a reasonable chance of excelling at the art of prediction.

From our point of view, we would certainly subscribe to this approach. We do not claim  to be “experts”, even though we do believe that we can evidence (through our track record over the past 8+ years of risk selection, underwriting and risk management) that we have some expertise in what we do (and so should be evaluated based upon that)- while being equally willing to acknowledge that we always need to re-appraise, refine and hone that expertise, and recognize that being “absolutely certain” is a dangerous mindset.

The Awbury Team

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Bayesian Re…

The concept of an AI-based reinsurer with the name “Bayesian Re” is an intriguing one. Unfortunately, the name “DeepMind Re” is probably off-limits, although perhaps Alphabet/Google has the name registered and warehoused somewhere?

Of course, any self-respecting (re)insurance industry actuary or statistician should be familiar with the now canonical theorem posited in the Eighteenth Century by the Reverend Thomas Bayes, a Presbyterian minister, and then developed by his friend, Richard Price when it was published posthumously in 1763. For years the theorem languished in obscurity; but, having been “rediscovered” independently by famed French mathematician, Pierre Laplace, who published his own version of the theorem in 1774, it began to receive wider attention, and today is one of those “terms of art” which one is expected to have at least a passing acquaintance with.

In Laplace’s words, “the probability of a cause (given an event) is proportional to the probability of the event (given its cause)”. In plain English, and to use Bayes’ approach: Initial Belief + New Data -> Improved Belief. New information leads to new or modified conclusions.

Like many things, it seems obvious in hindsight. As Keynes is supposed to have said: “When the facts change, I change my mind. What do you do, sir?”

Yet, we know from experience that human beings actually find changing their minds, even when they should, remarkably difficult. We are prey to numerous cognitive biases, and over-committed to already-acquired worldviews, or probability assessments, and notoriously unwilling to change a belief or opinion, even in the face of new evidence.

A reinsurer based upon AI and incorporating Bayesian reasoning would, in theory, be able to overcome the fallibility, inconsistency and contrariness of human judgement through an iterative learning process freed from emotion (the Lloyd’s follow-form start-up, Ki, is perhaps a modest precursor). However, for now at least, algorithms are largely created in our own image, and so have embedded biases, even if that may not be evident. This is not so much an issue when dealing with areas where a statistical basis already exists and the aim is to speed up and systematize decisions- motor insurance is probably the best current example of that. However, in other areas, such as, say, evaluating and pricing cyber risk, are underwriters really going to be comfortable relying upon a system whose processes are likely to become externally unfathomable, even if the outcomes may, in fact, be better than those derived from purely human reasoning?

And when it comes to credit, economic and financial risks, is a specific AI yet capable of “thinking” in terms that reflect and take into account human behaviour, and could one be built that had broad application? That would seem a moot point for now at least, although one could envisage it being useful, as we are sure it already is, in categories such as consumer credit, where the volumes and timeframes of available historical data are material and can be used to create and train algorithms.

In reality, perhaps the best advantage that corporeal general intelligences (i.e., human beings!) have is being self-aware and having the ability to recognize that they are fallible and can never assume that the search for the perfect probability assessment is complete. In other words, we should always look at the world in Bayesian terms, and question the reliability and relevance of new evidence to update our judgement.

However, we do like the idea of Bayesian Re!

The Awbury Team

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The Cascade Effect…

The recent rapid demise of Archegos Capital Management, (a hitherto relatively obscure family office and investment fund controlled by former “Tiger cub” (alumnus of Julian Robertson’s Tiger Management) Bill Hwang), apparently because of its inability to meet margin calls from banks providing it with prime brokerage services (including trade processing, structuring and lending) has, yet again, shown the dangers of becoming too “comfortable” with leverage, underestimating volatility and concentrated risks, and not knowing what an obligor’s true exposures are.

We have a distinct sense of “déjà vu”, harking back to the collapse of Long Term Capital Management (LTCM) in 1998, which involved most of the largest investment banks of the time, and required the US Federal Reserve to orchestrate a “private bail-out” of LTCM because of concerns about the overall financial market impact. What makes this case unusual is the relative obscurity of Archegos, compared with the fame of the storied background of LTCM.

From recent disclosures about Archegos, it would appear that it had significant, leveraged exposures to a relatively small number of US and PRC stocks, whose subsequent rapid decline in price led to at least one prime broker asking Archegos to provide additional collateral- i.e., making a margin call. When Archegos failed to meet the call, the prime broker(s) would have started to liquidate its positions to repay loans extended, or to unwind transactions, which then forced down further the market prices of the underlying stocks, triggering a cascade of similar actions by other prime brokers, leading to concern about whether or not the rapid unwinding might have knock-on effects elsewhere. As one Tokyo-based banker (quoted by the Financial Times) said: “The first cut is the cheapest.”

The issue which seems to have been a significant factor is the combined scale and level of leverage which had accrued within Archegos’ positions.

Of course, as equity markets had been rising and margin capacity remained widely available, the scale of the underlying risk exposures would have been masked by valuations. However, as markets fell, and “everyone headed for the exits at the same time”, because the exposure they had to Archegos was the same (wrong) way round, the sheer size of the aggregate positions being liquidated created a negative feedback loop, further compounding the scale of realized and potential losses.

So, the question might reasonably be asked how could such a comparatively obscure fund create such immediate havoc? No doubt, as more details come to light, that will become clearer; and enable an informed analysis of whether there were failures of regulation (because funds designated as family offices currently have minimal disclosure requirements) and/or of risk management.

For the Awbury Team (some of whom have been around long enough to remember the demise of LTCM as if it were yesterday!) it simply reinforces the time-worn adage: It is the risk(s) you cannot see (or ignore) that will ruin you- in this case, the level of Archegos’ overall trading, as well as its concentration and leverage. When all is seemingly ordered, controlled and defined one should be concerned about what is being missed, and the risk of an adverse shock. Call it “protective paranoia”, if you will.

Such a lesson applies equally in the (re) insurance arena; although, fortunately, without the backdrop of material financial leverage. One must never stop reviewing one’s portfolio of risks, looking for hidden correlations or aggregations that might be triggered by an unexpected catalyst.

Footnote: Archegos (ἀρχηγός) is the English language transliteration of the Biblical Greek noun for leader, or ruler…

The Awbury Team

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Choke Points and Points of Failure…

At Awbury, we are always interested in understanding more about factors that can cause disruption and failure, or cause forecasts to require material revision, as well as how they may interact across economic, financial and governance systems.

The pandemic has certainly highlighted interdependencies and the impact they can have on policy effectiveness. For example, the ordering, production, distribution of vaccines has proven the reality that even members of a supposedly aligned entity (the EU) can make decisions with the best of intentions that prove counter-productive and divisive, a situation then exacerbated by the fact that the world’s largest manufacturer of vaccines is India’s Serum Institute, whose own operations are subject to the dictates of the local government’s “vaccine nationalism”. Thus, a new choke point appears in terms of pandemic suppression.

Or consider the Suez Canal, which, like the Panama Canal, is an obvious chokepoint when it comes to global trading in goods, accounting for an estimated 12% of the total by volume. Clearly, if it becomes blocked, that is a problem. In recent years, ships have run aground for various reasons, but been re-floated relatively quickly. Now, however, not only has another ship run aground, but it just happens to be one of the world’s largest container ships, and fully laden; while no-one yet fully understands why the grounding occurred. Naturally, queues are building both within the canal, as well as at its entrances, and there are wildly varying estimates as to how the ship will be re-floated, and when. What was a “manageable” chokepoint, just became potentially unmanageable for ships the size of the Ever Given.

Of course, once one starts looking for potential chokepoints, one sees them everywhere! While the immediately obvious consequence of the recent Texas winter storm was in terms of disruption to power generation and supplies of natural gas, because facilities were not “winterized”, the unexpected lingering effect was on the petro-chemicals industry, many of whose hugely-complex plants experienced a so-called “hard shut-down”, meaning that their operations were stopped abruptly, rather than in a controlled manner. As a result, the return to full operation may take months, resulting in disruption of supplies to global supply chains of key products such as polypropylene, polyethylene and PVC, with significant increases in prices another consequence.

And (as we have alluded to before), in a world which depends on ever more complex computer “chips” to build and advance its technologies, the security of supply from Taiwan-based “fab”, TSMC, is of critical importance because it is not only dominant in terms of scale but also in the capabilities of its products. The destruction of its plants or diversion of supplies would vividly demonstrate what a point of failure looks like- particularly when supply disruptions are occurring already.

One paradox that all the above examples reveal is that, no matter how much we may think that the world is now digital and de-materialized, we cannot avoid the physical, because that still underpins everything else, and is sometimes surprisingly vulnerable, and we need to be ever-vigilant in identifying and assessing how, where and why a choke-point or point of failure may be created.

The Awbury Team

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Approaching Nirvana, or Another False Dawn…?

Approaching Nirvana, or Another False Dawn…?

After years of weak pricing across most product categories, 2020 produced some signs of the long-fabled “hard market” for P&C underwriters.

According to the Marsh Global Insurance Market Index pricing rose by an average 22% year-on-year for the last quarter of 2020, with the trend having accelerated since the end of 2018, when it was only 2.1%. And the average masks some wide disparities- 7% in Casualty, 20% in Property and 47% (sic) in Financial Lines.

To say that such increases are needed would be an understatement. The industry as a whole has been barely profitable at the underwriting level (although with wide company-level disparities) over the past decade, meaning that reported profitability has depended on investment results, which have been somewhat more stable, albeit decreasing also. Of course, 2020 demonstrated how volatile such returns can be quarter-by-quarter, with the possibility of rising US interest rates threatening at least “interim pain” in investment portfolios heavily weighted towards bonds and other fixed income products, before re-pricing begins to occur. As Warren Buffett said recently: “Bonds are not the place to be these days.” He could be wrong, but adding the perception of higher investment risk to underwriting uncertainty must give senior industry executives pause for thought.

Of course, the question arises as to how much of the increase in premium rates will flow through to the Combined Ratio on a net basis. After all, “social inflation” remains endemic, while costs for managing claims are also rising. Add to that persistently elevated numbers of catastrophe events (whether “natural” or not), as well as uncertainties around the true scale of risks such as cyber, and concerns that greater climate risk represents a “new normal”, and one has a combination that makes forecasting underwriting outcomes increasingly difficult.

The events of 2019 and 2020 have, in predictable fashion, created a new “Class of 2020/21” cohort of entrants into the P&C (re)insurance arena, all promising to be disciplined and selective in their underwriting, and claiming to benefit from “cutting edge”, technology-driven approaches, free of legacy liabilities or systems. We welcome their entrance, and will watch with interest as to how many of them produce underwriting results which confirm that they truly have a sustainable “edge” (given that most of them have been founded by long-standing industry stalwarts), or demonstrate that they have well-controlled and flexible cost bases in an industry notorious for their lack.

Furthermore, in an era in which the industry should now have the ability to parse its wealth of historical data to produce much more granular and truly risk-adjusted pricing, even in the face of rising uncertainties in certain categories, we also hope to see evidence of that in underwriting results by class of business, and that underwriters will be able to avoid seeking volume at the expense of discipline (an abiding sin) simply because nominal prices have risen significantly. After all, most industries would be more than happy with an average 22% year-on-year increase in realized pricing!

At Awbury, we believe that properly-informed, value-added pricing, based upon rigorous underwriting, is key to building and maintaining our franchise; and that being lured by the potential chimera of much greater business volumes is simply foolish. So, we shall continue upon our path of an incremental, iterative and adaptive increase in scale, being inherently skeptical that this time the pricing cycle is somehow different for the industry, even though we shall be delighted if it proves to be so.

The Awbury Team

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