Bottom Line _____________________________________
How To Balance The Top & Bottom Lines _____________________ We live in an imperfect world and it is our job as risk professionals to manage uncertainties _______________________
Contents Making The Right Call Useful Quotes Exposure not Experience Premium Floats Walking Away Good Strategies Innovation Self Prescribed Therapy Conclusion
USEFUL QUOTES Rule No.1: Never lose money. Rule No.2: Never forget rule No.1. There are three 'I's in every business cycle. The 'innovator,' that's the first 'I.' After the innovator comes the 'imitator.' And after the imitator in the cycle comes the idiot." Price is what you pay. Value is what you get. Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway. Chains of habit are too light to be felt until they are too heavy to be broken. Someone's sitting in the shade today because someone planted a tree a long time ago. Risk comes from not knowing what you're doing. A public-opinion poll is no substitute for thought. It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
Exposure rather than experience when pricing the risk His comments to share holders in 2001 were all of us made a fundamental mistake by focusing on experience, rather than exposure, thereby assuming a huge terrorism risk for which we received no premium Basing decisions on experience when pricing risk is not only useless, it is actually dangerous D&O exposure
Model of premiums/floats Premiums paid upfront for the policies could be seen as a float which could be invested before it was needed for claim payments In 40 years he grew the float from $17 million to $50 billion This allowed him to take advantage of others weakness which enabled him to be fearful when others were greedy, and greedy when others were fearful
Model of premiums/floats The simplest, but most hazardous way of growing the float is to under price the risks being insured. Buffet would have non of that, not only does he select the risks which he wants to take, he understands how vital it is to have them priced correctly. The most important quality is temperament not intellect. You need temperament that derives neither great pleasure from being with the crowd nor against the crowd.
Madoff Those who saw the risk and walked away Not every major financial institution bought the Bernnie Madoffs story on which his $ 65 billion fraud was based. Merrill Lynch and Goldman Sachs declined to get involved eight years before the fraud was discovered. The basic reason was they never felt comfortable with Madoff and could not understand the investment process or the return
Good strategies are long on details & short on vision Ensure Cash flows Provide strategies and execute them with speed. To transform the culture, an unending and complex task, to make it to more responsive to customer needs, to bring passion to winning in the market, to value speed of execution over perfection of product or process. To make team work across the company divisions the rule, where previously turf wars had been the norm
Innovation Innovation has nothing to do with how many R&D $ you have. When Apple came up with Mac, IBM was spending at least 100 times more on R&D. Its not about money ! Its about the people you have, how you are lead and how much you get it. It is essential that the product should exceed customers expectations, it is not enough that it works.
Self Prescribed Therapy In the end I invite you to tap into the financial wisdom of our elders along with me, and become financially wiser. Hard work A ll hard work brings a profit, but mere talk leads only to poverty. LazinessA sleeping lobster is carried away by the water current. EarningsN ever depend on a single source of income. (At least make your I nvestments get you second earnings) SpendingI f you buy things you don't need, you'll soon sell things you need. SavingsD on't save what is left after spending; spend what is left after saving. BorrowingsT he borrower becomes the lender's slave. AccountingI t's no use carrying an umbrella, if your shoes are leaking. AuditingB eware of little expenses; A small leak can sink a large ship. Risk-takingN ever test the depth of the river with both feet. (Have an alternate plan ready) InvestmentD on't put all your eggs in one basket.
Conclusion 1.Understand all exposures that might cause policy to incur losses 2.Conservatively evaluate the likelihood of a loss occurring vs the probable cost if it does 3.Set a premium that will deliver a profit, on average, after both prospective loss cost and operating expenses are covered 4.Be willing to walk away if the appropriate premiums cannot be obtained