The Man who saved the world 45 years ago on Saturday

All of us need heroes and here is a story about someone who in an intolerable situation successfully managed a crisis which could have engulfed the planet. Remarkably it has got very little coverage.

On October 27th 1962, at the height of the Cuban missile crisis, a US warship was enforcing the quarantine of Cuba by depth charging a Russian submarine. To the Russian Captain, running out of oxygen and with temperatures on board around 100F and rising, they were under attack and were honour bound to retaliate regardless of the costs. He ordered that the nuclear weapons should be armed. Russian naval procedure required that the captain and two other officers had to agree to the firing. One second captain agreed, but the other, Second Captain Vasili Arkhipov, argued that the conditions for firing had not been reached, the hull had not been damaged and he succeeded in calming the situation.

The submarine's records are now public and at a Conference held in Havana on October 13th 2002 on the Cuban Missile Crisis, 40 years after the event, Robert MacNamara, the then US Defence Secretary, recognised how much closer to nuclear war we had been than anyone had imagined.

Amongst the lessons from this are:
You need robust processes for your strategy which are clearly understood when working under conditions of great stress and danger.
Moral courage to go ,if necessary, against the opinions of colleagues is essential.
Three heads are better than two in such situations.
The consequences need to be thought through. The US attendees at the Conference admitted that they had not done so thoroughly enough.

Sadly, Vasili Arkhipov died a few years ago, but he deserves a special place in risk and crisis management and in the relation of strategy to decision making.

I, for one, will toast Second Captain Arkhipov this coming Saturday, do you likewise - because of him, you can.

Big Brother and your car

Every day in the UK 55,000,000 car numberplates are scanned and checked for road tax and insurance.

Every year 40,000 cars found not to have insurance are crushed. As these are mostly of the old banger variety the car stock is being improved by this cull, with the likely, but not proven ,benefits of fewer accidents. Perhaps it could be proved by checking insurance records to see if the number of accidents involving uninsured drivers has decreased over the 6 years since the Motor Insurance Database was set up to meet the requirements of the EU 4th Directive that in event of an accident involving a foreign national the insurer of the car could be immediately indentified.

The Motor Insurance Database has been a hugely successful IT project, carried out, not by the usual suspects - such as IBM or Siemens, but by a team assembled initially by the ABI, one of whom, Penny Coombs, was in charge of their motor insurance division. It required a huge effort by insurers and fleet owners to meet the reporting requirements of the database and because it didn't massively overrun its budget or fail to produce the goods it has vanished from the public's ken.

If it hadn't been created , in an age of international terrorism it would probably have had to have been and then we would have had the MOD creating the specifications. Not a pretty thought.

Recruitment without qualifications

Doris Lessing who won the Nobel Prize for Literature last week never attended University as an undergraduate. I am no big fan of academic qualifications , especially now everyone seems to get Upper Seconds, and I would like to celebrate the City's long tradition of giving people opportunities, regardless of where they were educated. The only criterion is can they make money.

The risk companies face now is that as they no longer need a post room, who would with all the postal strikes and the convenience of email, they are hard pressed to find entry points for street smart kids who could go on, like Martin Sullivan the CEO of AIG, to run the company.

Fear not though, just go round to your local coffee bar and chat to the staff who have come from all over the world to work in the City. Some of them have impressive qualifications, most of them have tremendous motivation. The HR departments should take note.

In Japan after 90, they forget how to die.

Statistics are not all lies, but they need a healthy degree of scepticism, especially when they are projected forward 40 years or so. However every risk manager should take a look at the following UN website if they want to understand the trends that are likely with the ageing of the global population and to tease out the risks.

http://www.un.org/esa/population/publications/worldageing19502050/

There is the astonishing fact that, due to the one child policy, the Chinese have 29 million more boys than girls under the age of 24. Then there is the projection that from having 600 million people over 60 in 2000, we will have 1,2 billion in 2025 and 2 billion in 2050, by which time , they estimate, there will be more people over 60 than under 14 on the planet for the first time ever. How will the taxpayers be able to afford all those senior citizen's travel passes, let alone find a car park space for the able bodied?

Of course some of these projections can be way out, but the trend to an older population is clear. In Japan where they have the greatest percentage of people older than 90 of any society in the world and still expect longevity to increase, they celebrate their centenarians' enthusiasm for life every week on what I cannot claim is a riveting TV show.

Have a look at the data from the UN it will raise a lot of questions, including how accurate some of it is.

No plan survives contact with the enemy

To illustrate risk management issues and their importance to good decisions you need good stories. Gordon Brown has provided us recently with a very clear example of the dangers of not thinking through the consequences by allowing his staff to talk up the possibility of a general election.

The two mistakes he made were to consider only the upside of what was being suggested - that it would damage the Tories, and set the scene for a successful early election - and he forgot von Moltke's maxim "no plan survives contact with the enemy."

In Brown's case his actions united the Tories, flushed out some of their most attractive policies regarding inheritance tax which turned the marginal seats in their favour, and made David Cameron a winner when he had been on a very bad losing streak. It was one of the most spectacular own goals in recent British political life.

The largest industry in the global economy

The global Insurance Industry takes in $3.7 trillion in premiums a year and has $17 trillion of assets under management. This makes it , according to the United Nations, the largest industry in the global economy. The UN sees the industry's core competence as risk management. So now you know why you deserve to be so important.

Raising standards at no cost

Standards are useful, but when they cost money then many, who would benefit from understanding them and using them, just don't bother.

If you have business in China you might like to know that just a few days ago we arranged for the Chinese Risk Management Standard which was in the more traditional script used in Hong Kong and Taiwan to be translated into simplified Chinese which is more easily accessible to those who live in mainland China. This translation was carried out in less than 2 days by the staff of Ximco Corporation in Shanghai and we are very grateful for their efforts.

The original Risk Management Standard was developed in 2002 by the Institute of Risk Management, the Association of Insurance and Risk Managers and the National Association for Risk Management in the Public Sector. It has been downloaded over 100,000 times in English and is available in French, German, Italian, Spanish, Portuguese, Polish, Dutch, Danish,Swedish, Russian, Arabic, Japanese and now in two forms of Chinese. Here is the link to the new simplified Chinese Risk Management Standard. It is available free of charge, as it should be.

Download the Simlified Chinese Risk Management Standard...

Unintended Consequences - Bah, Humbug!

The comment from Mervyn King that he was debarred from covert operations to rescue Northern Rock by EU rules, a comment which some European sources have said is a complete misreading of the EU legislations' intent, reminds me of what AIRMIC's Counsel said about the Treasury's implementation of the Insurance Mediation Directive - see my previous blog.

With the Insurance Mediation Directive the lawyers in the Treasury, aided by those in the FSA, were so keen to stick to their principles of regulation (sound familiar?) and the purity of their operation that they disregarded the spirit of the EU Directive and gold plated the regulation so that some groups, such as buyers of insurance, would have to be unnecessarily regulated.

Perhaps they did this because such an approach gives them more power ( this would be the way Japanese bureacrats would work), perhaps because then they can't be blamed as they've covered every eventuality, but perhaps most of all in the "nanny knows best" attitude that pervades the British Civil Service they did it because they are micromanagers and they fear that events will get out their control. Regardless of the FSA's commitment to risk based principles too many of their lawyers are promoting the opposite of a risk taking approach.

Of course in the case of Northern Rock events did get of control. There were "unintended consequence of recent legislation" said the Governor of the BoE which prevented him from acting as he would have liked to restore stability. This is a miserable excuse. The triumvirate of the Treasury, the BoE and the FSA should have been regularly conducting crisis management testing to ensure that any legal obstacles to their actions were identified and action taken before the event to remove them.

Any dependency model which starts with the objective of preventing a run on the banking system ( surely one of the top risks for the triumvirate) would have then searched out the obstacles and assigned weightings to them. The causes of the run are immaterial to the exercise when it comes to legislative limitations on actions. What I would like to know is " Were such models developed, were they tested and why weren't the obstacles which the Governor spoke about identified?".

It seems that the regulators who have preached business continuity planning and stress testing to their markets have been remiss when doing the same for their own operations.

How to panic the Treasury

It is no surprise that any decision involving three parties in likely to be a dog's breakfast. And so it is in the case of Northern Rock where the triumvirate is the Treasury, the Bank of England and the Financial Services Authority.

My experience of dealing with the Treasury is that they can only be panicked into action if their preferred modus operandi of doing nothing is going to result in ignominy or ridicule.

Just after 9/11, when it was clear that the insurance market for aviation risks was going to be withdrawn at the end of seven days, the way we (AIRMIC) got the Treasury to come to the party was by leaking a letter to Brown from concerned airlines to the Financial Times who obliged by running it as their lead story on the Thursday. By the Friday evening Brown had announced that the Treasury would act as insurer of last resort, this gave the rest of the world the weekend to figure out what they were going to do before the Monday deadline for removal of coverage.

When the Insurance Mediation Directive from the EU was passed into law by the Treasury they did not devote enough legal resource to defining who they were anticipating the directive to cover, which meant that after they and the FSA had had a go, it turned out that risk managers who purchased insurance on behalf of their subsidiary companies would be considered intermediaries. When asked whether there was any public interest at stake or whether they had intended to regulate risk managers the answer from both bodies was "no". The only way out they advised was to provide a legal opinion as to why risk managers should not be regulated. After considerable expense it was only when AIRMIC got an opinion from counsel which castigated Treasury for their shoddy work of drafting the EU regulations into UK law that suddenly the FSA found an answer and saved everyone a lot of effort.

When I asked the Cabinet Office for a refund of the legal fees they declined.

Unintended Consequences of names

Back in the early 1990s the Austrians were found to be adulterating their wines with diethylene glycol (anti-freeze) in order to make them sweeter. When this became public knowledge in Japan the consumers not only stopped buying Austrian wines ,they also gave Australian wines a miss too. If you cannot differentiate your brand sufficiently in the consumers' mind then you may lose out through no fault of your own.

There is a limit to this same name concern and somehow I don't think that Northern Foods or Hard Rock Cafes need to be as agitated at present as the Alliance and Leicester.

However a consequence of the Northern Rock bailout means that the chances of Brown calling an October General Election have almost dropped to zero and Alistair Darling may yet join Norman Lamont and James Callaghan as a Chancellor for whom events in the markets exposed the limitations of their power.