Born to be Wild…(with apologies to Steppenwolf)

This year, it will be 50 years since the Summer of ’68 (Here’s to you, Mrs. Robinson…), when red bandanas were the height of street-fighting fashion, access to a ready supply of cobblestones essential, the cocktail du jour was a Molotov, MAD was not just a comic- and the Viet Cong’s Tet Offensive provided clear evidence that the Viet Nam War was not necessarily going America’s way.

Why should we mention this?

Because, while 1967 was the Summer of Love, soon thereafter, in 1968, the world appeared to be a more dangerous, restless and uncertain place; and yet, in spite of all the fears expressed then for the future, we are still here.

Of course, it had become rather difficult to find much sense of the positive in 2017, given all the governmental oppression being inflicted in too many parts of the world; and it is clear that the “mood” within many unfortunate polities remains dark and full of foreboding; whilst the series of fires, floods hurricanes and earthquakes in the second half of the year simply added to a feeling of malaise.

So, in the face of all this gloom, we thought we would point out a few items that may give one some hope for Humanity at the start of a new year, if only in the short (non-geological time) term. We hasten to add that the Awbury Team has not suddenly begun self-medicating with hallucinogenics. Rather, we always try to take a measured view of risks in terms of both their probability and severity, even if we cannot quite bring ourselves to subscribe to “world without end”.

– The US and the EU economies are growing robustly in real terms, with no immediate signs of a recession
– Real interest rates remain at close to historically low levels, yet in most major economies inflation remains relatively in check
– While still quite volatile, the price of crude oil has settled into a range that most producers and purchasers can tolerate
– At the same time, the shift towards less carbon intensive fuels gathers pace
– The (re)insurance markets have demonstrated their robustness in face of a significant deterioration in NatCAT loss experience
– The Brexit negotiations have not yet gone off the rails, and there are signs that some sort of rational negotiation will finally take place
– The majority of the planet has begun to take the threats posed by global-warming seriously
– Developments in analytics, machine learning and AI continue to generate potential new paradigms and opportunities
– The number of people globally moving out of abject poverty continues to rise
– Star Wars: the last Jedi shows that all is not lost…
– Winter may be coming (in the Northern Hemisphere), but it will end

And while at Awbury we are never complacent, we continue to have a robust pipeline of business across our franchises, which we aim to execute upon and continue to build with the support of all our valued clients and partners.

With best wishes to you, Dear Reader, for good fortune in 2018.

The Awbury Team


It seemed like a good idea at the time…

At Awbury, our business model is built on the concept of adding value in providing solutions to the credit, economic and financial issues which our clients bring to us- a very different approach from the flow-based, commoditized, cost-plus one which still tends to prevail in much of the (re)insurance industry (let alone elsewhere.)

Scale may be a wonderful thing, but only as long as it creates sustainable value. This is why it seems odd to us that large-scale M&A activity designed to create scale rarely seems to manage to improve Combined Ratios; with the attrition of cost bases and reserve releases only serving to beat back the impact of softening pricing and the disruption coming from “InsureTech”, as the industry struggles with excess capital (even after Q3/17) and the unwillingness of many participants to “walk away” from pricing that is below the so-called “technical reserve” level. Although the events of Q3/17 have raised hopes that pricing trends in the affected NatCAT markets will turn upwards, the evidence remains mixed as the renewal season approaches its end.

The corporate world in general is littered with spectacular examples of value-destruction (leaving aside the truism that the majority of mergers or acquisitions fail to deliver on their supposed benefits)- AOL/Time Warner and Rio Tinto/Alcan come to mind. Both were considered “good ideas” in their time, but turned out to be spectacularly bad in terms of creating value. It will be interesting to see how the AT&T/Time Warner and Disney/Fox transactions turn out. And consider that Shell has accepted the fact that its purchase of US “tight oil” assets near the height of the last oil-price peak was a very poor decision, and now seeks to unload them in some way that at least saves face.

So, why do such events occur with monotonous regularity, when patience and discipline in building one’s existing business would be more likely to preserve and create value?

There can be no single answer to this, but it seems reasonable to assume that senior executives and Boards are susceptible to the blandishments of bankers and other “advisers” who have an interest (and need) to generate business in order to earn fees (and keep their jobs.) Of course, this is something of a caricature. However, there seem to be few investment banks which have the ability to resist providing a “valuation letter” that magically demonstrates that the price for “Xco” bid target is fair and reasonable.

In reality, the success of a transaction depends upon many factors, both tangible and intangible. And some demonstrably work (witness Ace and Chubb), while others do not (Travelers and Citibank).

We suspect that one of the issues that leads to frequent failure and value destruction is “groupthink”; as, once an “idea” gains traction, more and more of those involved are sucked into the belief (because that is what it is) that “buying Xco” is a very good idea, and that the naysayers are the ones who are irrational. All complex organizations develop a culture over time, which is a major indicator of their long-term viability and success, because, unless it is fit for purpose, open and adaptable, it is likely to lead to poor decision-making and an unwillingness to change a decision in the light of further information. In such circumstances, those who challenge the orthodoxy are likely to find themselves ignored, or worse.

At Awbury, our approach has been, and will continue be, to grow organically (avoiding delusions of grandeur) and to provide carefully constructed, bespoke, confidential and value-added products and solutions to our range of clients. Our ideas should not merely “appear” to be good ones; the products and structures we create must demonstrably be valuable, with the actual outcomes being the objective evidence.

The Awbury Team


Coining it…or just Untethered?

The Awbury Team’s members have been around long enough to have observed, lived through and survived multiple financial bubbles, crazes and crashes. However, we have looked on at the current frenzy surrounding the rise in the value of bitcoin (lower case, as opposed to the upper case Bitcoin payment system) with bemusement, which we shall use as a proxy for analogous “crypto-currencies”.

While the company behind the South Sea Bubble was a fraud, one could at least plant tulip bulbs and console one’s self with the beauty of the flower after that mania ended (Fun fact: in 1637, the Dutch East India Company was worth USD 7.9TN in today’s terms). In the case of bitcoin, it seems that what was once considered a curiosity and subsidiary component on a blockchain-based system has become the focus of the most extreme rise in “value” in recorded history. Having started life with what, in hindsight, is probably the most expensive pizza purchase in history in May 2010, and reaching a price of USD 1 in April 2011, bitcoin was supposedly quoted at a price of over USD 19,000- in early December. To say that the price is volatile is a serious understatement, as it becomes increasingly difficult to discern what, if anything, is “real” about it.

This begs the questions of what exactly bitcoin is; what purpose it serves; and what impact it is having or will have on the financial system, including (re)insurance. Classically, a currency is a medium of exchange, (one hopes!) a store of value and a unit of account. How does bitcoin measure up?

Frankly, as bitcoins are simply entries in a Bitcoin blockchain ledger and there is no-one who guarantees that a bitcoin has any particular value, such value depends entirely on supply and demand. Given that bitcoin is designed in such a way that there are only ever supposed to be 21 million of them in existence, and that creating new ones (up to the limit) costs increasing amounts of both computing power and (literally) energy, one can see how, as the desire to own a seemingly scarce item increase, demand can lead to the sort of frenzy seen in the past few weeks.

In theory, one can transact using bitcoin, assuming that the other party has both the desire and ability to accept them. However, the frictional cost of doing so keeps rising, and the time required to complete and validate a transaction also continues to increase, leading to the risk of “double-spending” of the same bitcoin. So, as a medium of exchange, bitcoin is far from optimal; and, of course, the volatility in its price also militates against that use. While, theoretically, bitcoin could be used as a unit of account for book-keeping purposes (and after all, Bitcoin is supposed to be a distributed ledger), that purpose seems to have become obscured by the frenzy surrounding whether or not bitcoin can be considered a store of value.

Of course, the “bitcoin billionaires” (yes, they now exist) would argue that it most certainly does. However, in reality, one can only realize that value in the real world by converting it into a more conventional and widely accepted currency, such as the US Dollar. Couple this with the thinness of the market; the fact that it would appear that holdings are quite concentrated; and the continuing reluctance of major banks to become involved in trading and clearing bitcoin transactions (in particular the newly-minted CME and CBOE futures markets), and one begins to wonder when and how bitcoin will become anything more than a speculators’ plaything and one more opportunity for the less salubrious fringes of illegal businesses to try to shield their profits from discovery and confiscation.

So, why, one might ask, should (re)insurers care about all this?

Well, consider the current obsession for growing revenues from cyber-risk coverages. Crypto-currencies are supposed to be free from the risk of “hacking” or misappropriation because of the underlying technology. Yet there are already numerous reported instances (and probably many more unreported) of bitcoins and their analogues “disappearing”, being misappropriated or simply stolen. If a (re)insurer had written a cyber-risk or even a standard theft and fraud coverage for a client who owned bitcoin, quantifying and pricing that risk might prove rather challenging, as might defining exactly what had been lost. Or consider covering risks relating to the default of a clearing broker or exchange involved with bitcoins. In theory, initial and variation margins should cover all but the most extreme loss scenarios; but, given the lack of reliable data and the brief history of the “asset”, what exactly is an “extreme loss scenario”.

At Awbury, we aim to maintain an understanding of complex risks and the opportunities they may bring, so we shall, of course, continue to monitor the evolution of the blockchain and crypto-currencies, while remaining a healthy skepticism about whether there is, as yet, sufficient data and market understanding to qualify and quantify the true nature and level of the underlying risks.

However, if you have a blockchain or crypto-currency risk that needs a solution, give us a call


When is an “unknown unknown” really unknown? And have all the Black Swans gone Grey?

Donald Rumsfeld was once much mocked for his parsing of risks into categories such as “known knowns”; “known unknowns” and “unknown unknowns”. Yet he had a point. There is really no excuse for allowing known risks to overwhelm one’s capital or business model; while accepting risks one can identify, but which are difficult to assess or quantify, is somewhat inadvisable, as many financial institutions have found out the hard way through misaligned incentives and imperfect models.

So, what about “unknown unknowns”? Objectively, one does not even know that one does not know. Consider “cyber risk”. Fifty years ago, that would have probably counted as an “unknown unknown”, because the products, systems and software that have created the risk did not exist- even if some might have been foreshadowed in the works of various science fiction authors. And what of the still-running asbestos saga? One could lay reasonable odds that none of the original underwriters foresaw what would happen, or that the risk existed.

In a broader context, into which category should the recent actions of the Saudi Crown Prince “MbS” be placed? Expropriation for political or financial gain is nothing new, but the event was considered unforeseen, as could be gauged by the reactions. So, a Grey Swan perhaps, being charitable?

The point of all this sophistry is that the ability to survive and prosper in any business, including (re)insurance is based upon being able to detect, avoid and mitigate risks before they reach unmanageable proportions. However, the quality of risk detection capabilities appears to vary widely: it requires a willingness to be proactive in “thinking the unthinkable”; which, frankly, many find difficult because it can lead to some uncomfortable conclusions and requires being both contrarian and disciplined. FOMO is not a viable approach!

Consider the risk of nuclear confrontation- most likely involving North Korea (altho’ both India and Pakistan are nuclear powers, with muddled military doctrines and a long history of enmity and mistrust). Lobbing the odd low-yielding ICBM across the Pacific Ocean is not likely to be a good survival technique for the Kim dynasty, which leads into a consideration of the potential behaviours of other actors as they try to gauge responses. The risks of miscalculation are probably higher than they have been for more than a decade, made more dangerous by the rapidly-increasing nuclear weapons capabilities of the regime in North Korea, and they are no longer negligible. This then requires thinking about the consequences of a nuclear weapons exchange. MAD (Mutually Assured Destruction) might not apply in this case in the literal sense, although tens of millions of Koreans would rather not see the hypothesis tested, but the increased probability might cause underwriters to take another look at the wording of their Nuclear Exclusion clauses.

Of course, this is a “known known” risk, but it requires mental effort that many may not wish to take, which practically speaking could push it into another category.

Turning back to “unknown unknowns”, worrying about them is counter-productive. They are, by definition, currently “unknowable”. One should instead focus on risks that can be detected and then decide where they sit upon the spectrum of probability and severity; and whether they are sufficiently capable of being measured, and so priced and managed. At Awbury, while we are always surveying our environment for new and unexpected risks, we continue to emphasis our ability to provide our clients with products and techniques for managing their “known knowns” and “known unknowns”.

The Awbury Team


What if…it had been worse?

Lloyd’s of London recently published a useful paper ( on counterfactual risk analysis- a topic that will appeal to viewers of “The Man in the High Castle”, or readers of the novel Fatherland.

Counterfactuals, or “what ifs?” are interesting, because they require an individual to consider how even a small change can have a significant impact. After all, the “Russian Revolution” succeeded almost in spite of its primary actors; but what if it had not?

Turning to the more prosaic world of (re)insurance, the world of NatCAT is full of “what ifs?”- for example, the track of Hurricane Irma being 20 or so kilometres east, such that it hit Miami directly?

As the Lloyd’s paper quite properly (and importantly) points out, there are both “upward” and “downward” counterfactuals- the former asking what would have happened if things had turned out better; and the latter if they had been worse. One does not really want to operate on the basis of the “upward” approach!

Thinking about and modelling different potential outcomes, while now carried out on an industrial scale, both inside and outside (re)insurers, is still prone to bias and the lure of “commonality”. Paradoxically, if a regulator requires those it supervises to model the outcome of a series of standardized scenarios, it may create for itself a useful comparison of relative vulnerabilities or weaknesses across it charges, yet at the same time run the risk of causing them (and itself) to be constrained in thinking about risks that fall outside the dataset used.

Therefore, it becomes important to think about risk with less constraint, because “out of experience” or “unmodelled” events have the unfortunate habit of occurring rather more often than they “should”. Modelling the probability of defined risks to a 1-100- or 1-in 250-, or even 1-in 10,000-year standard is all very well, but what if it is the “wrong” risk, or the estimate of probability or consequence is seriously flawed? What if it is “not in model”?

Of course, some risks are inherently constrained or obviously bounded. For example, if one is an unleveraged equity or debt investor, one can only lose 100% of one’s investment; whereas, the risk of loss from, say, a rapid series of sequential and inter-connected defaults by large, highly-leveraged financial institutions can wreak damage far beyond anyone’s or any then extant model’s expectations.

In the realm of (re)insurance, managements will also argue that they have controls over aggregation of risks; set careful limits based upon rigorous technical underwriting; and, naturally, have a carefully-crafted programme of reinsurance and/or retro in place. However, given that each (re)insurer is an autonomous actor, which tries to protect the proprietary nature of its risk management protocols, what if all the assumptions about network linkages and effects are wrong and the “Big One” (whatever it is) occurs? Having focused on first-order effects, they potentially miss the second- or third-order ones.

Interestingly, the issue with counterfactual analysis is not that something could not have happened, but more often that it was not conceived of as capable of happening; or a necessary connection was not made; or an event forgotten. Intriguingly, the Lloyd’s paper also makes the point that many European languages do not have any expression equivalent to English’s “counterfactual history”. As Wittgenstein said: “The limits of my language mean the limits of my world”, which begs the question of vocabulary as a constraint upon conceptualization.

In the world of NatCAT, post-event analysis often tends to be limited to understanding what happened and why; but gives little, if any consideration, to what might have happened, which is unfortunate because, yet again, it means that thinking and modelling become self-limited. One has to believe that, in an era where the resources available to model and develop scenarios are becoming ever more powerful, it should be possible to generate counterfactual scenarios and outcomes with more frequency than appears currently to be the case.

At Awbury, we do not pretend to be believe we are infallible. However, we do believe that our thinking should be as unconstrained as possible, so that we minimize the risk of downward counterfactuals.

The Awbury Team


Innovate effectively, or become a Zero…

The news of the creation by Google’s DeepMind unit of an enhanced and self-taught AlphaGo Zero, which trounced its own progenitor AlphaGo, and appears to play not only differently, but at a different level from human experts, set the Awbury Team thinking about the topic of innovation and change.

FinTech and InsureTech are all the rage, with more and more (re)insurers announcing “venture” units that seek access to new ideas and technologies externally; while predictions are made constantly about the industry being yet another one to be “disrupted” (another newly-fashionable term). Executives may wish to ponder the meaning and consequences of the word, and the fact that it implies that they are in danger of losing control over the destiny of their own businesses to others- disrupt, or be disrupted, because business as usual is not an option for most.

Whether rightly or wrongly, there is also a perception that the (re)insurance industry itself is “out of ideas”; and at the mercy of the latest “fad”, as it seeks desperately to find revenues that will augment its current “zero-sum”, commoditized business lines, and tries to justify losing tens of billions of dollars as a result of the recent spate of NatCATs, wiping out years of profit accumulation.

One can see similar patterns in other industries, where the incumbents, having become complacent, find that they are no longer able to generate significant ideas themselves, and have to rely on third parties to do the basic research that they themselves used to do- “Big Pharma” now being a classic example. The glory days of Bell Labs and Xerox PARC are long gone, while many governments seem to regard funding basic research (other than for “defence” and “national security”) with disdain, because it does not serve the particular vested interests to which they are in thrall. Clearly, there are pockets of excellence such as DeepMind and various university research departments, but too much of what passes for innovation is merely disruption and a “re-hash” rather than original- such as Uber, or WeWork. The so-called “gig economy” is hardly a step forward in human progress.

This matters; because, while the “D” in “R&D” is also essential, without the basic research on which it builds, there can be no progress. Incrementalism is all very well, but Humanity’s welfare has historically improved because of step-changes resulting from different modes of thinking.

So, the (re)insurance industry needs to focus on how it can generate truly fresh ideas itself, that will enhance its offering and margins. If it does not, others will consume its premia, and it will become increasingly obsolescent, as investors lose patience with moribund returns that do not even meet the cost of capital. There is absolutely no reason why a Google, Amazon, or Apple cannot create (re)insurance businesses built upon new business models, and almost certainly using artificial intelligence (AI).

The ability to generate executable and scalable new intellectual property is a fundamental requirement for any business that wishes to survive and prosper. Note the use of the word “executable”. Paradoxically, while basic research and new ideas underpin progress, if one cannot then execute on them, the enterprise is pointless. One’s lunch will still be eaten!

At Awbury, while we regard ourselves as an integral part of the industry, our franchise depends upon both innovation and execution; and we have absolutely no intention of becoming “zeros” as we build for the long term.

The Awbury Team


Homage to Catalonia…

George Orwell (who was badly wounded in the Spanish Civil War fighting against the fascist insurrection led by Franco) must be spinning in his grave in light of the Catalan regional parliament’s declaration of independence for Catalonia (or rather Catalunya- one of 17 Spanish regional governments) as an “independent republic” (no more Spanish monarchy for Catalans!)

Not surprisingly, the Spanish government has subsequently exercised its own “nuclear option”; and invoked direct rule over what it sees as a recalcitrant province, led by fantasists bent on destroying the Spanish state (for if Catalonia goes, one can be fairly certain that the Basques at the least will aim to follow.) For avoidance of doubt, the action of the Catalan government is considered a criminal act by Spanish loyalists, as the constitution provides no mechanism for secession. The difference from the UK is that the Scottish referendum on independence was a negotiated process, not unilateral.

One only has to look at the recent history of Europe to be concerned about the potential consequences of the Catalans’ actions; especially since, even within Catalonia, it is considered arguable that there was no true majority in favour of independence and that what was characterized as a referendum was a “democratic coup”. Not surprisingly, no other sovereign state has recognized the “Catalan Republic” as a lawful sovereign entity.

It should be said that Awbury’s interest in these events is “academic”, in the sense that we have no direct or even indirect exposure. However, as we have written before, we are always looking for second or third order effects beyond the obvious.

Of course, it is far too early to predict how the relationship between Catalonia and Spain will evolve, but the legal consequences are already becoming evident, as large corporations move their legal domicile outside the “republic”.

One can also imagine that a frisson of concern is moving across the investor, trade credit and political risk markets. What happens if Catalans resist the central government, such that the rule of law breaks down, taxes go unpaid and uncollected, or an economic blockade is imposed? What if a local Buyer wishes to pay, but cannot because the local banking system is not functioning for “external” payments?

Taking the scenario further, what if Spain as entity begins to unravel, as the former Yugoslavia did some 25 years ago (without the bloodshed one sincerely hopes!)?

Under the conventions of international law, sovereign debt passes to successor states. Spain currently has approaching EUR 1TN of obligations. Apportioning that across a fragmented range of successor states would be a nightmare. It is somewhat ironic, that less than 5 years ago there were legitimate concerns about the ability of Spain to meet its obligations, as it suffered a wrenching recession, from which it has begun to recover; and now, when that concern should have been obviated, it may begin to return because of the political acts of a recalcitrant minority. Compounding the issue is that much of Spain’s sovereign debt is held by offshore investors, including the European Central Bank (ECB). While the risk of dissolution and default is still remote, the fact that the possibility now exists is telling, because a year ago it would have been considered laughable.

And bear in mind that Spain is not the only major European state with a separatist movement (leaving aside the UK). Italy has long had a north-south rift politically; and one can imagine that the Lega Nord is watching events in Catalonia and Spain with some interest.

The overarching point here is that risk can appear out of a “clear blue sky”, and that one has constantly to update one’s knowledge and understanding of the risk terrain and the possible ambush sites. The risk of Catalan secession was not an “unknown unknown”, but we are quite sure that it feels like an ambush to many.

The Awbury Team