A timely reminder is due to think about the difference between probabalistic and possibilistic thinking in the world of risk and its management and in particular for the insurance sector. This is so important because in advice given since 1999 on corporate governance and risk managmeent by the ICAEW (The Centre for Business Performance,The Institute of Chartered Accountants in England & Wales,) and particularly in No surprises, guidance to directors of listed companies, they stated that Risk management is essential for reducing the probability that corporate objectives are jeopardised by unforeseen events.All that the company is trying to achieve can be affected by risk exposures.
Furthermore in their advice in how to implement Turnbull guidance on internal control they stated that the purpose of a risk management policy document is to set out clearly for all employees, the board’s attitude to risk and the appetite for risk, which it is prepared to accept. Directors should communicate clearly what actions they are taking to manage these risks, providing sufficient information to allow investors to make judgments’ about them.Even earlier than this the Operating and Financial Review, introduced for listed companies in July 1993, set out non-mandatory recommendations for listed companies to disclose information on risk outside the financial statements. It recommended a discussion ‘identifying the principal risks and, in qualitative terms, the nature of the potential impact on results.’
Perhaps we could say in summary this meant that all potential significant and material risks should be disclosed to investors.Where possible of course.
Then 9/11/2001 happened and new language was introduced to the world of risk and possibility by Donald Rumsfeld by way of unknowables.
The world of insurance uses historical data and probabalistic thinking in its approach to underwriting and managing risk in the non-life sector.In liability, accident and health the future impact of today’s event, accident or emergency is considered because the claims to be paid will be in later years.This introduces possibility into their underwriters’ thinking.
The point to be made is that probability is favoured because this allows mathematics to be used.However the possibilty of things happening should still be considered, because despite not being able to put a number to an event, it doesn’t mean it will not happen ,and it still needs to be managed?!
We don’t agree with Donald Rumsfeld that there will always be unknowables.Call us soon to find out more,whether you are an insurer or in another sector, about the use of our models of intelligent imagination in your processes of risk identification.They will make a considerable contribution to your thinking and enable risk appetite conversations to happen in a more informed way.