When I was just a wee lad of an umbrella underwriter in the early 80’s, we would secure reinsurance for 1MM x/of 1MM at a reinsurance premium of $200 net. Occasionally a reinsurer would push back and demand a whopping $225! Even though it took me until August to finally get through freshman algebra, I knew it would take 5,000 policies to get 1MM premium. We’d have to write 10 to fifteen thousand clean risks to have any hope of breaking even. And a 2MM loss, even in 80’s money was not really a “Black Swan” event; let’s call it a Black Cygnet event.
The concept of a "Black Swan" event, popularized by author Nassim Nicholas Taleb, refers to an unpredictable event with severe consequences that has a significant impact on society. From financial crises to natural disasters, these rare and unexpected occurrences can disrupt economies, industries, and our daily lives. While it is impossible to predict or prevent such events, we can take steps to minimize their potential impact by preparing ourselves and our communities.
Our industry has institutional mechanisms to handle severe losses especially reinsurance and increasingly more astute data collection modelling. In a huge industry 10,000 policies is not quite a drop in the bucket. However, for most MGA’s and Program administrators, taking an unexpected severe loss can blow your profit commission, diminish your bragging rights and, most unfortunately lead to a program (and your livelihood) canceled. So let’s apply some of the tips that Taleb and others offer for Black Swan events to our Black Cygnet ones.
This article provides valuable insights and practical tips on how to prepare for a "Black Swan" event.
- Build Resilience: The first step in preparing for a "Black Swan" event is to build resilience - individually and collectively. Strengthen your physical and mental well-being. Building strong social connections and support networks can also provide crucial assistance in times of crisis. For Underwriters make sure your day-to-day processes and protocols are consistent and sound on a year over year basis.
- Stay Informed: Be proactive in staying informed about potential risks and emerging trends. Regularly monitor reliable sources of information, such as trusted news outlets, government advisories, and expert analysis. For underwriters this also drills down to data you can obtain from your risk management campaigns.
- Diversify and Hedge: Diversification is a key strategy in preparing for unforeseen events. Allocate your investments across different asset classes to lower the risk of losses during volatile or uncertain conditions. This is much easier said than done for an MGA that has limited resources. You can very easily spread your efforts so thin so that unfortunately end up a number of fragile books.
- Develop Skills and Expertise: Invest in continuous learning and personal development. Acquiring new skills and knowledge can enhance your adaptability in an ever-changing world. Again it is tough for MGA’s who absolutely must be experts in specific areas to earn your keep. Brokers have the luxury to be generalists.
- Establish Emergency Preparedness: Create a comprehensive emergency preparedness plan for yourself and your family. Identify potential risks specific to your location, such as earthquakes, floods, or pandemics, and create guidelines on how to respond. Stock up on essential supplies like water, non-perishable food, medications, and first aid kits. For underwriters I guess that would be Fitbits or stress balls.
- Contribute to Community Resilience: Recognize that collective efforts are crucial in preparing for and responding to "Black Swan" events. Professionals definitely need to contribute to our community.
Conclusion: Preparing for a "Black Swan" event is a prudent approach in an unpredictable world. For underwriters it is important to pay attention to your renewal book. When they come to evaluate your “pen” they will look what you have done. Your book needs to be within guidelines and properly documented. Prudent MGA’s can deploy Generative AI to document your underwriting decisions. Platforms like Understudy offer monitoring of changes in exposure during the policy term as well as a system of real time auditing and bordereau promulgation. Everyone gets tapped sooner or later. What will help you keep your facility is the quality of your process.
