Pandemics in context- the longer view…

There is barely anyone alive who remembers the last true global pandemic, the so-called “Spanish Flu” of 1918/19, which by most estimates killed over 50 million people (at least 3% of the then total world population) in the aftermath of World War One.

Many articles have recently been written about the human cost of that pandemic. However, it had surprisingly few long-term political or economic effects, because it occurred in a world already traumatized by destruction and the imperial convulsions in the aftermath of the war, and more than a little distracted by the continuing unfolding of the Russian Revolution, which (it is sometimes also forgotten) impacted a huge swathe of the Eurasian land mass from Archangelsk and Minsk to Vladivostok.

This time is rather different. While there was a lot of “noise” around various themes and issues, for most of the developed world at least economic conditions were still fairly benign, and so the noise and chatter were just that, with little real impact.

Covid-19 has upended what amounted to wary complacency. Yes, a recession of some sort was anticipated as the business cycle was unusually prolonged (this time was not different, so to speak); but no-one foresaw the economic equivalent of a train hitting the buffers.

As a result, even if the impending sharp economic contraction is relatively short-lived (which seems increasingly unlikely), the judgements made and behavioural effects are likely to linger. As Morgan Housel of The Collaborative Fund recently entitled an article: “Wounds heal, scars last”. The Great Depression had lasting effects on the behaviour of individuals. As a result, corporations and governments generally became more conservative in social and economic terms, deflating money supply and raising tariffs, even if those actions tended to compound the very problems of lack of growth and opportunity which they were trying to avoid. One can argue that it took at least a full generation for behaviour to become more relaxed and optimistic, and for “animal spirits” to return after the further trauma and upheaval of World War Two.

What is quite striking about current circumstances is that in barely 8 weeks “everything has changed”. Fear, disbelief and uncertainty stalk many lands; while government has gone from being the problem to the (hoped for) answer, even if the effectiveness of actions being taken is, as yet, barely  tested. As long as only relatively modest geographies, or “unimportant” populations were impacted by, say, SARS, MERS or Ebola, normality returned quite quickly.  As an aside, AIDs was (and still is in some areas) a pandemic, although it was never treated as such. Lessons may have been learned, but they were remarkably quickly forgotten. The world was manifestly wholly unprepared for what is now unfolding.

So, the question now arises as to whether this time will be different, because individuals and policymakers will finally realize that complex, interdependent systems transmit shocks much more quickly than assumed; and also create emergent behaviours, with non-linear and as yet unpredictable consequences.

In such circumstances, standing still or freezing, like the proverbial “rabbit caught in the headlights” is the worst possible action to take: it changes nothing, can have no positive outcome (wishing something were not so does not make it go away!) and actually destroys value. While acting defensively when necessary, well-considered, bold decisions are called for if the world in general, and the (re)insurance industry in particular, are to emerge from the current crisis without lasting damage to economies and franchises.

At Awbury, we constantly strive to be ready defensively to step up and meet the challenges faced, while going on the offensive when opportunity presents itself.

The Awbury Team


Government-Induced Recession, Interdependence, and Disciplined Pragmatism:

By now we suspect many, if not most, (re) insurance executives are suffering from emotional “whiplash”, as one hitherto unthinkable movement after another occurs within markets and countries, while (for those whose companies are publicly-quoted) gazing in disbelief at how a sudden change in sentiment can trash a share price, even for fundamentally sound businesses.

Consider the paradox that, in essence, most governments whose populations are affected by the Covid-19 pandemic are deliberately inducing a recession in their economy through mandated lockdowns, business closures and quarantine actions. Yet, at the same time, they and their central banks are further increasing their levels of borrowing and inflating their balance sheets to counter the consequences of their own decisions.

The State (Leviathan), where it is still functional, is re-asserting its dominance, even if the terms of many “rescue” measures are skewed to favour certain sectors or business sizes. That is not to denigrate the politicians, who are faced with a crisis we are sure none of them ever contemplated or imagined; but we shall be living with the second order (and beyond) effects and unintended consequences for some time, unless the pandemic is considered under control in fairly short order, and such measures prove unnecessary and can be curtailed or revoked. The old saw used to be: “A billion here, a billion there, now you’re talking real money!” No one can substitute T for B, at least in the US.

What is also becoming increasingly clear is that, to function most effectively, the global economy must remain open. The crisis has demonstrated how economies are interdependent, as well as exposed to  hitherto hidden or overlooked “choke points”. Yet, one consequence of what is happening is that many governments will decide that they must increase domestic self-sufficiency to the extent possible. This is rational as a protective measure, but the slope to autarky is a dangerous one; and the consequences for many could be a regression in terms of economic output and efficiencies. Ricardo’s theory of comparative advantage is going to be re-examined and tested. We doubt it will be found wanting.

Events reinforce the need for rigorous statistical analysis of data; careful assessment of facts; an understanding of interdependencies; the ability to assign realistic parameters to probabilities; and an understanding of individual and societal psychology. Intellectual laziness, or an unwillingness to face the realities of the situation and adjust accordingly, will destroy hitherto “safe” businesses. Ostriches will become an endangered species.

Of course, the ability of models to predict the severity, or to anticipate the source of disruption is often severely limited. They are a guide or means to construct a framework, and must be treated as such. Therefore, the business approach must be based on resiliency to extreme shocks of outsized magnitude and of unknown nature; not on the ability to withstand narrowly-described scenarios.

The pandemic demonstrates that, as human beings and societies, we are all in this together- even observing “social (or physical)-distancing” is a co-operative act. Covid-19 respects neither borders, nor wealth, nor position. Maintaining cohesion and effectiveness, based upon a shared set of values; open communication; and robust systems and processes are essential to survive and ultimately prosper when the crisis abates, as it surely will.

And one final thought- as one City grandee put it: “When the plague broke out in Athens, it enabled Sparta, which was more disciplined, to become dominant”. No prizes for who plays which role in current times. There are few, if any, certainties in geopolitics, but Thucydides must be smiling.

To be very clear, at Awbury we remain fully operational; and remain ready and able to meet our Insureds’ and clients’ needs; and to answer any and all questions.

The Awbury Team


The psychology of fear, March Madness, and tearing up the templates…

The last couple of weeks have provided ample confirmation that fear is a major factor in how economies perform. The Great Financial Crisis (GFC) provided many prior examples of that.

Unfortunately, and to state the obvious, fear has consequences which are non-linear and self-referencing- fear feeds on itself. Roosevelt’s famous phrase (“So, first of all, let me assert my firm belief that the only thing we have to fear is…fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance”) from his speech at his First Inauguration, may be a trope, but no less true for that.

The level of volatility and the ever-reactive and disjointed nature of many governments’ actions recently have demonstrated that the “standard” models and their underlying assumptions do not work (as they patently did not in the GFC) because they consistently underestimate the risk in the right-hand tail of the distribution, and that individuals have difficulty processing the impact of their decisions beyond first order effects.

It is the Amygdala overwhelming the Pre-frontal Cortex.

Of course, given actions which are unprecedented outside times of war or insurrection, and the still high levels of uncertainty over the true scale and consequences of Covid-19, which is indifferent to borders, rank or wealth, knowing when, why and how societies (and the economies which their behaviours impact) will resume some semblance of normality is at present unknowable. At some point the consequences of government actions will run the risk of causing permanent harm to those societies which (in theory at least) they are meant to lead and protect which outweigh the loss of life caused directly by the pandemic.

Meanwhile, the dislocations in the credit markets, while creating what amounts to “fear and loathing” and leading to often indiscriminate actions is something that has to be worked through. At such times, a dispassionate and careful re-examination of whether the original thesis for the purchase of an asset or taking of an exposure still holds is essential. Liquidity and access to sustainable contractual cashflows, as well as quality of management will make the difference between those who survive, even if they need to adapt and re-structure to do so, and those whose business models are found wanting and so irredeemably fail.

As Warren Buffett has said: “Only when the tide goes out do you discover who’s been swimming naked”. Involuntary nudity runs the risk of becoming rather too prevalent in some quarters (as it did in the wake of the GFC). The question will be whether the survivors internalize the lessons now being learned in real-time.

At Awbury, we continue to operate the full range of our business (while adopting all the necessary protocols to ensure that we continue to do so). We may be habitually paranoid, but that does not mean that we are paralyzed. Far from it. While prudently managing our existing portfolio, we are actively engaging in considering new opportunities, as well as in maintaining open communications with all our partners and Insureds. Maintaining pro-active dialogue and communication will ultimately repay the time spent many times over.

So, give us a call.

The Awbury Team


T’ain’t what you do, it’s the way that you do it…

As the title lyric of a song originally recorded in 1939 by the iconic Ella Fitzgerald states, it can matter just as much how you do something as what you do. The goal or purpose may be essential, but is subject to a failure of execution, as the result of which bad things may happen.

The natural tendency in such cases is to assume that the failure was one of process, but what if there is more to it than that?

Consider “Risk Management”, which now has various paradigms, including “lines of defence”, “enterprise risk management” (ERM), tail VaR, and “emerging risk committees”, yet frequently fails when severely tested.


Perhaps because its basic approach and orientation is flawed, as Steve Denning provocatively argued in a recent article for Forbes (Ten Reasons Why Risk Management Increases Risk).

Denning’s basic premise is that very often the real risks to an organization are not “somewhere out there”, but within the organization itself- the product of a top-down, bureaucratic approach both to management in general and the way in which Risk Management is approached, which creates a false sense of comfort, but in reality increases rather than decreases risk.

In a VUCA (Volatile, Uncertain, Complex and Ambiguous) world, such complacency poses an existential threat.

One key point that Denning makes is that Risk Management generally assumes that markets are complicated (and so, with effort, predictable); whereas, in reality, most are inherently complex and so unpredictable. In such an environment, theories and models are of little use, because the only way in which to understand what is going on is to interact with a complex system; see how it behaves, and adapt accordingly. As we have seen with the reactions to the potential coronavirus (Covid-19) pandemic, complex systems do not have linear outcomes.

Similarly, decision-making can be flawed because it is non-iterative- essentially a binary “go/no go” mentality, rather than iterative and responsive to changes in environment and outcomes. Of course, (re)insurers may well argue that they do adjust their behaviours depending upon experience- that is almost an article of faith. However, what if their basic premise of being in a particular class of business is, in itself, a failure of decision-making, because of a refusal to admit that some commoditized lines of business are irredeemably unprofitable for the camp followers, who simply go along for the campaign, and hope to profit from it?

Another flaw in traditional Risk Management is the tendency to centralize oversight, control and “prediction”, even if lip-service is paid to the concept that the “first (business) line” is primarily responsible for monitoring and managing risks assumed. In reality, the existence of a seemingly well-staffed ERM function tends to mean that everyone assumes that someone else is responsible for managing risk, so nobody does.

Perhaps, the abiding sin of Risk Management is that it is seen in purely in preventative, negative terms. Only bad things can happen, so we must protect ourselves from harm at all costs. Risk aversion is endemic. In reality risk is not always a four-letter-word, because there is equal risk in failing to focus on opportunities. In Denning’s telling phrase: “the label of “risk management” needs to be subordinated to opportunity management””. One may argue about the relative weights to be applied, but the point is important if Risk Management (including within (re)insurance) is ever to help create value, rather than stifle or destroy it.

In our view, Risk Management is an holistic, devolved and flexible construct, in which the entire Team is involved, rather than a silo-ed, hierarchical one. Siloes and hierarchies are themselves sources of risk.

The Awbury Team


Quids In…

We have written before about the importance of culture in building and sustaining an effective business or organization- something which cannot easily be defined by a Mission Statement or even “Values”. The proof lies not in the words, but in actions and behaviours and their impact.

However, there is another, related concept that is also worth considering, to establish whether a consistent approach can be identified and replicated across an entity- namely “quiddity”, which does sound as if it comes from a Harry Potter novel!

However, as Gerald Schorin and Mike Wilberding recently pointed out in the HBR (“The X Factor of Great Corporate Cultures”), a “quiddity” is “the inherent nature or essence of someone or something”. One may argue as to whether an entity comprised of many individuals can have an “essence”; but the concept is potentially valuable for requiring those individuals to reflect on what the distillation of its history, principles and outcomes amounts to; and how that can be used to protect and further an entity’s goals.

How then is such “quiddity” captured and expressed?

It amounts to a coherent internal narrative. Entities whose value is based primarily on reputation create this as something to which its internal constituencies can subscribe, because they identify closely with it and are, themselves, fundamental to the entity’s success.

Equally important is that the narrative is explicable to and accepted by an entity’s external constituencies- clients, suppliers, business partners and the wider public. This is not some “stealth” version of what is now usually termed “stakeholder capitalism”, but rather integral to what gives particular entities a sustainable competitive edge.

One paradigm for the concept comprises the “14 Principles” created by the founder of Lockheed’s legendary Skunkworks, Clarence “Kelly” Johnson ( While many of these are more relevant to the work of a sophisticated design and engineering business, and government contractor, some would repay broader adoption:

From #3: “Use a small number of good people (10% to 25% compared to so-called normal systems)”

From #5” “There must be a minimum number of reports required, but important work must be recorded thoroughly”

From #8: “Don’t duplicate so much inspection”

From #12: There must be mutual trust…[and] very close cooperation and liaison on a daily basis”

And from #13:”Access by outsiders to the project and its personnel must be strictly controlled by appropriate security measures.”

The essence of the Skunkworks was to employ the best engineers and give them significant autonomy in thinking and creating, while ensuring that they had adequate resources, delivered on a timely basis, and that they were accountable and rewarded for their outcomes.

None of the above is exactly “rocket science”, yet the narrative that was created as a result of adhering to and identifying with their content created a sustained competitive edge.

In (re)insurance, senior managers and executives tend to be well-versed in expressing the rote platitudes about how their organization is “above average” in terms of its performance and potential (when in too many cases it manifestly is not). It seems that they fail to reflect upon and understand what makes a member of that industry a true positive outlier in terms of performance over time, and so fail to distil a “quiddity”, in which all their constituencies will recognize something “special”. Adhering to the standard narrative is pointless and adds no value.

At Awbury, we are constantly re-examining and honing our own “quiddity”. We would be happy to discuss it with existing and potential clients and partners.

The Awbury Team


If I were you, I wouldn’t start from here…

The punchline to the famous Irish joke about an Englishman lost in the in the backroads of Ireland and seeking direction from a local, brings to mind the persistent struggle which now faces many longstanding businesses, with the (re)insurance industry being no exception.

Burdened by legacy processes and systems, many fail to cope (in terms of creating value) in a world which is changing around them in ways that make a mockery of the argument that incremental and gradual change is still a feasible strategic approach towards long-term viability.

While “move fast and break things” is probably not the best alternative, it does contain the kernel of truth. There needs to be not only a comprehensive plan, but swift and effective execution.

In January, Oliver Wyman published a paper entitled “The Mindset Collision”, in which it contrasted the “Vision” and the “Value” mindsets- the former being focused on building the business of the future, foreseeing and adapting to new technologies and disruptors; while the latter focuses on delivering financial returns within a fairly short timeframe. In reality, of course, any business which hopes to have a viable and sustainable future needs to blend both approaches. It is all very well having grand visions, but without clear expectations of what return an investment should bring, there is a serious risk of wasting both time and resources- something that will not be lost on those who observe the travails of Softbank’s “Vision Fund”.

If one considers the (re)insurance industry, it tends over time, in the aggregate and in developed markets, to grow at roughly the rate of overall economic growth. This means that, unless one can either find a more efficient way of delivering the product, one has either to seek new markets, or create products that meet unfulfilled needs that command “value added” rather than “cost plus” pricing. Even regulators have realized that the industry needs to be encouraged to take more risks in terms of development by introducing the concept of the regulatory “sandbox”. Without at least some “vision”, the industry’s incumbents (other than those which have scale and network advantages) run the risk of “death by a thousand cuts”, as new competitors, unburdened by the above-mentioned legacy issues, peel away revenues from the most profitable business areas, or provide better-tailored products. Otherwise, as Oliver Wyman puts it, the risk is becoming the financial equivalent of a “dumb utility”, providing capacity priced at the margin, if one is lucky. Not exactly an enticing prospect.

The irony is that in a world full of complex and developing risks, the industry has the opportunity to grow and prosper if it can decide what it wants to be and how to achieve that. Maintaining the status quo, and repeating the usual hopeful mantras about improving underwriting quality, or re-deploying capital and capacity away from “unprofitable lines” is simply evidence of a state of denial. It singularly fails the “vision” test, as well as the “value” one, because it changes nothing.

If you do not understand that past is no longer prologue, and that nimbleness and adaptability, coupled with a clear purpose, are (frankly, as they always were) essential traits, businesses risk becoming, not just a “dumb utility”, but a “financial zombie”, unaware of its own reality, and doomed to stumbling and flailing about until someone “disaggregates” it.

The Awbury Team


Risk is what you don’t see…

The always thoughtful Morgan Housel (of the Collaborative Fund) recently wrote an article with the above title. Adding “or won’t” is equally instructive.

The point is, as most fundamental ones are, so simple and elegant; yet much of the (re)insurance industry (amongst all the rest) spends much of its time obsessing over the things it hopes it can measure and believes it can foresee. Obviously, in many product lines that is the rational and sensible approach, as many risks are, in the real world, bounded and constrained.

However, it is “in the misunderstood tail” that true risk lies. This being the first few months of a new decade (and we are not going to argue that point!), the media and what passes as thoughtful discourse (you know who you are, WEF Davos…) are full of “predictions”, risk surveys, incomprehensible network diagrammes and the like. This is presumably in the hope that the “naming of the risk”, or being part of a “knowledgeable consensus” will somehow make the risk less terrifying (as in “a trouble shared…”), because if it can be named or agreed upon we at least know what we are dealing with (or think we do).

So, as Housel points out: ”The same risks, repeated over and over, [occur in narrative] sometimes several years in a row”- elections, trade wars, climate change, nuclear war. Of course, there are existential risks. We have identified collectively a whole range of them. If they occur, it may well be “game over” for Humanity and “civilization”. Harsh as it may seem, and in no way diminishing the need to take them seriously, it is the ones that are unforeseen or not taken sufficiently seriously that tend to cause the most harm. They are “surprises”, by definition- even if, with hindsight, perhaps they should not have been (e.g., the Japanese attack on Pearl Harbor).

As we saw with the Great Financial Crisis (GFC), when a central tenet of belief (that US housing prices could not in aggregate decline significantly) proved to be unfounded, people were shocked and surprised. They panicked, with consequences that we still have to grapple with even now. With few exceptions (read Michael Lewis’s excellent book The Big Short), people could not contemplate that what happened not only could, but would.

Secondly, once surprised, and compounding the issue, people tend to extrapolate outcomes beyond the logical or probable, becoming (unduly) paranoid and pessimistic about the future, which often creates a worse outcome than if they had behaved rationally. It is useful to remind one’s self of that probability ex ante! Unfortunately, it is also hard to imagine any of today’s political “leaders” being seen as credible when uttering something analogous to Roosevelt’s: “The only thing we have to fear is fear itself”.

One could argue that such risks are “black swans” or “unknown unknowns”, but most are not. Naturally, one cannot plan for what one cannot imagine happening, but convincing one’s self that one has foreseen all the possible risks amounts to hubris.

From Awbury’s point of view, we are institutionally paranoid about risk. We know that we are not infallible or omniscient, and that the whole point of being in the (re)insurance business is to accept risk. However, we also aim to design our products and solutions in ways that not only meet our clients’ needs, but also contain mitigants and margins of error that minimize the likelihood of being surprised in a way or to an extent that causes ruin.

The Awbury Team