Paul Harwood, Member of the Risk Management Board, shares his thoughts.
About ten years ago, I came across a paper suggesting that there was a difference between risk and uncertainty. I passed over it at the time, thinking that this was pedantry of the worst kind. Then, as I became more involved in the risk world, the important distinction – especially for actuaries – became clear.
In short, a risk can be modelled, an uncertainty can’t.
So, mortality is a risk: the probabilities are defined within an acceptable risk, and as a result, the risk can be priced and insured. Brexit is an uncertainty: while different outcomes can be modelled, the likelihood of one or other outcome is much harder to establish, define, price and insure. Speculators may prefer to insure uncertainties because of the expected contingency margin that is built in.
What about coronavirus? It feels like an uncertainty that is transitioning into a risk, but what do others think?
The world doesn’t care about whether something is labelled a risk or an uncertainty, but should we? Definitions are at the heart of good risk communication. Speaking of which, the Data Visualisation working party is doing great work. It presented at the 2018 Life conference.