opportunity, risk and intelligence€¦ · • the (re) insurance industry is a catholic risk...
TRANSCRIPT
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Opportunity, Risk and Intelligence
Pete ThomasChief Risk Officer
Willis Re
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• 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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Emerging opportunity and emerging uncertainty
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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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“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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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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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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Cognitive failure
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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)
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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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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)
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Low frequency / High SeverityEarthquake + Tsunami + Nuclear: chain
catastrophes
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Decision biases
Source: Wikipedia, Decision Making and behavioral biases 13
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Additional types of decision biases
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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
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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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Underwriters’ conundrum
History
Polit
ics
Loca
lFe
dera
l gl
obal
Future trends
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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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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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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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The problem of persuasion
EMERGING
UNCERTAINTY
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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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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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THE ASBESTOS CRISISA case study for emerging risks, cognitive bias, and information
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Conflagration: the biggest problem of the 19th Century
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The Great Chicago fire
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The solution
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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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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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The tragedy
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The seminal event in casualty reinsurance history
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1965 Restatement of the Law of
Torts
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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
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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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Ten year roll call
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The class of 1980 ten years later… 34
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(Re)Insurance cycle
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80%
90%
100%
110%
120%
130%
140%
-15%
-5%
5%
15%
25%
35%
45%
55%
1971
1972
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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
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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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The future
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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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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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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
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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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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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Questions
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