Perspective | Underwriters Might Be Eccentric, But They Could Save Your Bacon

By: | January 3, 2020

Roger Crombie is a United Kingdom-based columnist for Risk & Insurance®. He can be reached at [email protected]

What is your greatest fear?

Mine is financial obliteration. Health is more important, but I regard that as largely circumstantial and luck-related. One has greater control over one’s finances, at least nominally.

Groucho Marx gave me the fear. I recall reading with a teenaged shudder that he had lost $800,000 (about $12 million today, but rarer) in the stock market crash of 1929. “I was a wealthy man on the eighteenth hole of a golf course,” Groucho wrote. “By the time I got to the club house, I was destitute.”

Since then, fear of insolvency has dictated my thinking and spending.

A lifelong friend, a 68-year-old, has somehow managed to squander the millions he earned and inherited and must eke out his remaining days on a shoestring. In the words of Donald Fagen, he has spent the last piaster he could borrow.

For both of us, his improvidence is the worst nightmare imaginable. It’s worse for him than me, obviously, but still: I’m experiencing this godawful catastrophe at close quarters.

Groucho said that “no one is completely unhappy at the failure of his best friend,” but I am.

Many lottery winners are broke within 18 months. Bad luck and trouble hover just around the corner. Catastrophe lurks withal. Knowing the statistical odds, I still cannot wrap my head around how a person might go from having too much money to having none whatsoever. Observing one simple aphorism rules out the possibility of penury: never spend capital.

My friend and I are the same guy, basically, but no one can completely understand another person’s thought processes. Yet anticipating how people will behave in advance of their doing so is exactly what insurance companies must do, day in and day out, with considerable accuracy. In assessing and pricing risk, the underwriter has to think of all the obvious things that might happen, and all the oblique things that might happen: the unknown unknowns, if you like.

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After that appalling day in September 2001, I began to wonder whether there were some people whose thinking was so different from the rest of ours that no one could forecast it. How could an abundantly sane underwriter, accustomed to a smooth ride through life, have come up with the risk of terrorists suicidally flying planes into the world’s tallest buildings? Sane people don’t think like that; perhaps they can’t think like that.

At the time, this greatly concerned me. Was some human behavior impossible to forecast? The implications weren’t good for anyone, not least the insurance industry.

It was a relief, therefore, to read that at one company (ACE if memory serves) such a risk had been modeled, albeit as an accident rather than as an intentional act.

To protect the good guys, insurers must out-think the bad guys, the very worst guys. Hence white hat hackers and risk assessors whose jobs force them to think like terrorists. Hence insurers presumably employing odd characters whose lateral thinking might save the financial day in advance of bad actors taking center stage.

Which leads us back to Groucho, who said: “Blessed are the cracked, for they shall let in the light.” &

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