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Opportunity, Risk and Intelligence Pete Thomas Chief Risk Officer Willis Re

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Page 1: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Opportunity, Risk and Intelligence

Pete ThomasChief Risk Officer

Willis Re 

Page 2: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

• Willis Re Inc. is a reinsurance broker. Willis Re Inc. is not a law firm. We do not give legal advice and nothing herein constitutes nor should be construed as legal advice. Such ideas are offered for discussion purposes only and do not constitute legal advice. It is believed that the information used in creating this presentation is correct, but no representations are made as to its completeness or accuracy, nor are any warranties made as to its fitness for any purpose. You and your legal advisors must make an independent assessment regarding all such matters.

• Any comments or observations made herein are for academic purposes only and are not for the purposes of reliance. Any such comments do not reflect the views of Willis Re Inc. or its clients.

A word from our lawyers

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Page 3: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

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Emerging opportunity and emerging uncertainty

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Page 4: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Emerging uncertainty

• Can develop over decades• The growth of Big Law and Big 

Insurance mirror society’s evolution from contract law as a vehicle for compensating injured parties and deterring wrong‐doers to tort law (and strict liability)

• The bias of blindness

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Page 5: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

“You cannot be certain about uncertainty”‐ Frank Knight

• Uncertainty: The lack of certainty. • “A state of having limited  knowledge 

where it is impossible to exactly describe existing state or future outcome, more than one possible outcome.” – Doug Hubbard

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Page 6: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Why is it hard to identify  emerging uncertainty or risk but even harder to get 

decision makers to act?

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The problem of bias

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Page 7: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The modern four riders of the Apocalypse

• Cognitive failure• Information / intelligence failure• Communication failure• Political failure

Every manmade or natural catastrophe has one of more of these riders: Asbestos, 9/11, Katrina, 2011 Tohoku earthquake and tsunami

Can information science can unseat these riders?

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Page 8: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Cognitive failure

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Page 9: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Cognitive biases

• The five initial cognitive biases that haunt risk managers:– Positive Illusions– Interpret events or make decisions in an ego‐centric manner

– Overly discount the future– A strong desire to maintain the status quo– Discount any problem (or unwelcome data) we have not personally experienced 

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(Predictable Surprises, The Disasters You Should Have Seen Coming And How to Prevent Them, Max H. Bazerman, Michael D. Watkins, Harvard Business School Press 2004, page 74 paraphrased)

Page 10: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Some effects of cognitive biases of organizations

• Failure to devote necessary resources to collecting information about emerging threats

• Failure to disseminate information (“too sensitive”)• Gaps in individual knowledge• Failure to integrate knowledge that is available but dispersed

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Page 11: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Cognitive biases of organizations

• Individual negligence and malfeasance• Ill defined responsibility and no has incentive to act• Lapses in capturing lessons learned• Long‐term erosion of institutional memory (personnel losses)

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(Predictable Surprises, The Disasters You Should Have Seen Coming And How to Prevent Them, Max H. Bazerman, Michael D. Watkins, Harvard Business School Press 2004, page 96 paraphrased)

Page 12: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Low frequency / High SeverityEarthquake + Tsunami + Nuclear: chain 

catastrophes

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Page 13: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Decision biases

Source: Wikipedia, Decision Making and behavioral biases 13

Page 14: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Additional types of decision biases

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Page 15: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

A 12 step program for minimizing bad decisions

• Check for:– Self interest bias– Affect heuristic – (in love with the idea)– Group think– Saliency bias– (past success)– Confirmation bias– Availability bias

• Check for:– Anchoring bias (where do numbers come from?)

– Halo effect– Sunk cost fallacy(attached to past)– Over confidence bias & competitor neglect

– Disaster neglect– Loss aversion

Source: HBR, June 2011, Before You Make that Big Decision, Daniel Kahneman, Dan Lavallo, & Olivier Sibony, page 51 15

Page 16: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Lessons from the 20th Century– the need for actionable information & 

intelligence • The (re) insurance industry is a catholic 

risk aggregator• Risks are evolving as societies look to 

transfer risk and loss from victims, the poor and taxpayers to industry and their insurers

• Demographics are driving increased in catastrophic frequency & severity

• The four riders of the modern catastrophe

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Page 17: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Underwriters’ conundrum

History

Polit

ics

Loca

lFe

dera

l gl

obal

Future trends

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Page 18: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The underwriting / pricing problem of change and time

19th, 20th and 21st Centuries

Historical, legal, social, legislative, regulatory and political changes over the past 100 years  e.g. contract to tort, no duty rules, sovereign immunity doctrines, strict liability, mass torts

What is going to happen over the next 100 years– not an idle question ‐ as the policies written today will pay claims and be tested in court over the next 100 years +

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Page 19: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Time, liability and calendar year reporting

19RAA Historical Loss Development Study, 2009 Edition

Liability losses emerge over time

Historical development paidLossesExcessReinsurance 

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Page 20: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The modern four riders of the Apocalypse

• Cognitive failure• Information/intelligence failure• Communication failure• Political failure

Every manmade or natural catastrophe has one of more of these riders: Asbestos, 9/11, Katrina, 2011 Tohoku earthquake and tsunami

Information science can unseat these riders

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Page 21: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The problem of persuasion

EMERGING

UNCERTAINTY

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Page 22: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Identification and persuasion

• Two sides of same coin– Cognitive biases– Complexity– Memes and Supermemes– False correlations– The problem of fear– The sand pile

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Page 23: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

It is so darn frustrating• You spot an emerging uncertainty or an 

emerging risk• You can’t persuade anyone

– Competitive market will not let you condition the risk

– The BOD is indifferent– The CFO’s vision is limited by the needs of the quarter

• If Nostradamus was a casualty underwriters in 1965 he would had a heart attack…

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Page 24: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

THE ASBESTOS CRISISA case study for emerging risks, cognitive bias, and information 

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Page 25: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Conflagration: the biggest problem of the 19th Century

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Page 26: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

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The Great Chicago fire

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Page 27: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The solution

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Page 28: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Southtown Economist April 16, 1936

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Asbestos will cost insurers $275 billion 

by 2015 

Five home fixer up ads

Thirty years later five asbestos 

defendants 

Potential new torts such as 

climate change torts may be a 

much bigger deal – the 

plaintiffs’ bar excels at R&D

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Page 29: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

1981 poster boasting about the use of asbestos

• When the Twin Towers went down on 9/11

• Thousands of New Yorkers, firefighters, police and first responder were exposed to asbestos that can cause aggressive cancers such as mesothelioma

• The damage can take 50 years to appear

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Page 30: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The tragedy

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Page 31: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The seminal event in casualty reinsurance history

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1965 Restatement of the Law of 

Torts

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Page 32: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

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Post WW II middle class and the development of big law

1950s1940s 1960s 1970/80s1965

1965 Restatement of Torts 2nd

Asbestos 19th and 20thCentury’s

miracle cure to

the problem ofconflagration

BIGLAW

Page 33: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Riders’ roll call: cognitive bias and informational & intelligence failures?

• The Reinsurance Association of America (RAA)

• Just to give you an idea of how important information is the RAA, which is the industry lobbying group, provided me their class of 1980, 1990 and 2000 and the roll call ten years later

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Page 34: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Ten year roll call

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Page 35: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The class of 1980 ten years later… 34

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Page 36: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

(Re)Insurance cycle

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80%

90%

100%

110%

120%

130%

140%

-15%

-5%

5%

15%

25%

35%

45%

55%

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

P&C % Chg NPW P&C ROE P&C CR

80%

90%

100%

110%

120%

130%

140%

-15%

-5%

5%

15%

25%

35%

45%

55%

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

Reins % Chg NPW Reins ROE Reins CR

RO

E an

d G

row

th in

NPW Com

bined Ratio

U.S. P&C Insurance Cycle

U.S. P&C Reinsurance Cycle

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Page 37: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The future

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Page 38: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Demographics – a driving force for mega crises

• The big story of the 2nd half of the 20thCentury is the rise of the global middle class

• This new coastal and urban global middle class will want the same life style, infrastructure, consumer products and legal protections

• 1950s redux

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Page 39: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

China And India Will Have To Build By 2030 – 14 New York Cities

Source: Foreign Policy, September 2010

• Asia will be home to 55% of world’s urban population

• China will add 400 million urban dwellers more than the population of United States

• India will add 215 million urban dwellers

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Page 40: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

It Is Not Just China And India• 2030 2 billion more people will join the middle class• 80 million people a year are joining the middle class*• 5 babies are born every second

Source: Goldman Sachs, The Expanding Middle: The Exploding Middle Class and Falling Global Inequity 40

Page 41: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

We have been through this before…the evolution of the US tort 

system  redux?• How will these countries deal with 

the resulting pollution, property damage, bodily injury and personal injury from their industrial revolution?

• A larger global middle class + more infrastructure = more complicated and interrelated global crises

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Page 42: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

The future

• The new age of austerity and the rise of the global middle class will encourage the global academic search for new theories of liability to transfer costs of compensation & remediation from taxpayers to shareholders, insurers & reinsurers 

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Page 43: Opportunity, Risk and Intelligence€¦ · • The (re) insurance industry is a catholic risk aggregator • Risks are evolving as societies look to transfer risk and loss from victims,

Questions

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