opportunity, risk and intelligence€¦ · • the (re) insurance industry is a catholic risk...
TRANSCRIPT
Opportunity, Risk and Intelligence
Pete ThomasChief Risk Officer
Willis Re
• 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
2
3
Emerging opportunity and emerging uncertainty
3
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
4
“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
5 5
Why is it hard to identify emerging uncertainty or risk but even harder to get
decision makers to act?
6
The problem of bias
6
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?
7
Cognitive failure
8 8
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
9
(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)
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
10
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)
11
(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)
Low frequency / High SeverityEarthquake + Tsunami + Nuclear: chain
catastrophes
12
Decision biases
Source: Wikipedia, Decision Making and behavioral biases 13
Additional types of decision biases
14
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
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
16 16
Underwriters’ conundrum
History
Polit
ics
Loca
lFe
dera
l gl
obal
Future trends
17
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 +
18
Time, liability and calendar year reporting
19RAA Historical Loss Development Study, 2009 Edition
Liability losses emerge over time
Historical development paidLossesExcessReinsurance
19
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
20
The problem of persuasion
EMERGING
UNCERTAINTY
21
Identification and persuasion
• Two sides of same coin– Cognitive biases– Complexity– Memes and Supermemes– False correlations– The problem of fear– The sand pile
22
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…
23
THE ASBESTOS CRISISA case study for emerging risks, cognitive bias, and information
2424
Conflagration: the biggest problem of the 19th Century
25 25
26
The Great Chicago fire
26
The solution
27 27
Southtown Economist April 16, 1936
28
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
28
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
29 29
The tragedy
30 30
The seminal event in casualty reinsurance history
31
1965 Restatement of the Law of
Torts
31
32
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
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
33 33
Ten year roll call
34 34
The class of 1980 ten years later… 34
35 35
(Re)Insurance cycle
36
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
36
The future
37
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
38
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
39
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
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
41 41
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
42
Questions
43