Insurance. The Psychological Framework.

I was having a chat with an investment banker. He was really tensed, and angry. The reason: risk managers at his bank are barely accepting any financing proposal. The economy is shrinking, and hope of loan repayments is low. And i thought to myself, it goes the same in the insurance industry; the eternal war between growth managers and risk managers.

Lets go deeper; is it a friction based on facts or just a risk perception? Is it about portfolio management or the personality of the broker? Is it about growth and loss ratio KPI or some kind of personal chemistry? To many of you reading this article, you cannot but agree that risk perception is in many times psychological. We try to justify the psychology of fear into numbers and facts. But fear is an intangible emotion and very hard to really contain it in a certain guideline or an excel sheet.

Allow me to go even deeper. The insurance proposer has a fear that he or she remedies through an insurance policy. In fact he is transferring this fear to the developer. The developer is happy to solve this fear by presenting it to the underwriter. The underwriter studies this fear and spots levels of fear that he or she cannot handle, then the developer carries these fear layers back to the proposer. And it goes on and and off by creating the insurance industry.

I want to make sure that i am not at all neglecting the science and statistical and actuarial framework of underwriting and risk management, i am just reflecting on the emotions surrounding this platform. I came to a conclusion, after sharing ideas with hundreds of insurance professionals, that insurance is an emotional game, bringing people together, with a relationship fueled by fear and greed. And this is why the insurance industry is not that sexy to work in. It is not a fulfilling job and requires a tremendous amount of emotional intelligence, emotional labor and constantly changing, in torment, money perception.

It is like a cycle of increased risk appetite and fear of loss. Insurance companies build aggressive development strategies and then after being hit by harsh claims, cave and freeze. There is no common ground between all the players in the insurance sector (client / brokers / developers / underwriters / finance / leaders) each entity has distinct personal benefit that hardly correlates with other parties. And this is where friction comes in.

And the problem is not the people, the problem is in the game. It is in the reward mechanism of each party involved. And here comes John Nash with his Nash Equilibrium!

Nash equilibrium, named after Nobel winning economist, John Nash, is a solution to a game involving two or more players who want the best outcome for themselves and must take the actions of others into account.

If you are interested in finding out more, next week will dig deeper into the game theory and how it can heal the insurance sector!

Roy Keyrouz - Insurance Professional