In his customary "Industry Outlook" address at the ISOTech conference on Monday in Las Vegas, Frank Coyne, ISO's chairman, president and CEO, pondered the challenge of achieving sustained success. Coyne touched on the works of several management gurus, including the celebrated authors of "In Search of Excellence," "Profit from the Core" and "Creative Destruction." However, Coyne implied, the greatest insight came from the pre-Socratic philosopher Heraclitus, whom Coyne quoted as saying, "Nothing endures but change."Heraclitus was the philosopher of "flux" who famously said that no man can step into the same river twice because it won't be the same river -- and it won't be the same man. Given how pleasant constancy is and how distressing change can be, it is no coincidence that Heraclitus was nicknamed the "weeping philosopher."
Coyne saw Heraclitus' maxim validated by the failure of many of the most successful companies to sustain their advantage amid changing market circumstances over time, and also by P&C insurers' slowness to respond to the changing realities of risk. For example, when Hurricane Hugo hit Charleston, S.C., in 1989, it was seen as a once-in-a-century event. That was just three years before Hurricane Andrew, to say nothing of the many storms we've seen since. "Heraclitus was right," Coyne commented.
Accurately pricing risk has become more important than ever, as insurers' investment returns have plummeted as a result of the current financial crisis, Coyne noted. Unfortunately, the P&C industry has shown a surprising degree of vulnerability in managing its underwriting risk, he suggested. Citing research by A.M. Best, Coyne said that poor management of underwriting risk was the primary cause of 68 percent of P&C company failures from 1969 to 2007. Further breaking down the research, Coyne said that of those underwriting risk-related failures, the greatest proportion (38.1 percent) were owing to deficient loss reserves; catastrophe losses represented only 4.2 percent.
The current financial crisis has underscored the need of having the right information at the right time, Coyne implied. The crisis represents a "huge failure of enterprise risk management," he said, but if there is a silver lining, it is that companies will take risk management more seriously. "Successful companies will recognize that facts are friendly," Coyne remarked.
Facts are not everything, however, Coyne implied. "At the end of the day," he said, "It's the human element, the gut, that will determine the risk your company is willing to take."
Insurance is about risk, after all, and risks are calculated in terms of probability, not certainty. That idea may have been on Coyne's mind as he quoted another philosopher of sorts, Karl Wallenda: "Being on the tightrope is living; everything else is waiting."When Hurricane Hugo hit Charleston, S.C., in 1989, it was seen as a once-in-a-century event. That was just three years before Hurricane Andrew, to say nothing of the many storms we've seen since. "Heraclitus was right," Frank Coyne, ISO's chairman, president and CEO commented.