Heading Off Surprises

In a world where a single ship accident can disrupt global trade, it's time we return to the too-often-neglected discipline of scenario planning.

Who had "giant cargo ship" on their bingo card for possible disasters at the start of 2021? What about "derecho in Iowa" in 2020? "Global pandemic" at the outset of 2020?

Few of us foresaw any of those specific disasters. I certainly didn't. I didn't even know what a derecho was until the massive wind storm whacked Iowa, causing $7.5 billion of damages and some $5 billion of claims against insurers -- more damage than in most hurricanes.

But some at least entertained such possibilities. And it's time that we all broadened our thinking by returning to the too-often-neglected discipline of scenario planning.

Bill Gates warned us of the possibilities of a pandemic during a TED Talk in 2015, based on thinking akin to scenario planning -- which involves developing stories about possible futures that, while not necessarily probable, are at least plausible and would require drastic action. Gates even got the contours of COVID-19 right, warning of a virus that could be spread through the air and that would have people infecting others before they knew they had contracted the disease. Gates said the world was woefully unprepared and recommended what he called "germ games," the medical equivalent of war games, in which governments would simulate responses to a hypothetical virus and spot their vulnerabilities (in this case, their very many vulnerabilities).

Others have worried about potential disruptions to supply chains as trade has become more global, which makes something like the Suez Canal a choke point. Still others have raised concerns about the effects of climate change, such as may have contributed to the derecho.

But we keep getting caught flat-footed, with serious implications for both clients and insurers.

Now, I'm not suggesting that anyone should have predicted that a ship as long as the Empire State Building is tall would wedge itself athwart the Suez Canal for six days, holding up $10 billion of cargo a day and causing many ships to be rerouted around the Cape of Good Hope, adding weeks to their journeys.

Still, scenario planning has shown itself to be an effective tool for gaming out problems, stemming back to the pioneering work that Royal Dutch/Shell did beginning in the 1970s. According to a 2003 article in Strategy + Business, "Scenario planning alerted Shell’s managing directors (its committee of CEO equivalents) in advance about some of the most confounding events of their times: the 1973 energy crisis, the more severe price shock of 1979, the collapse of the oil market in 1986, the fall of the Soviet Union, the rise of [Islamic extremism] and the increasing pressure on companies to address environmental and social problems."

That's a pretty good set of warnings.

The article adds: "The method has since become widely popular outside Shell, not just in corporations but in some governments. In South Africa, for example, scenario planning played a major role in the peaceful transition from a system of apartheid to a stable multiracial government."

I'm no expert on scenario planning, but I'll try to seed the discussion with some classic articles on the topic.

Here is a Harvard Business Review article from 2013, which explains the history of the work at Royal Dutch/Shell and argues that, even when scenarios don't play out as imagined, "a sustained scenario practice can make leaders comfortable with the ambiguity of an open future. It can counter hubris, expose assumptions that would otherwise remain implicit, contribute to shared and systemic sense-making, and foster quick adaptation in times of crisis." 

Here is a 1995 article from the MIT Sloan Management Review that lays out the methodology in detail. The article says that scenario planning doesn't just lay out lots of data about how the future might play out but "goes one step further. It simplifies the avalanche of data into a limited number of possible states. Each scenario tells a story of how various elements might interact under certain conditions.... A detailed and realistic narrative can direct your attention to aspects you would otherwise overlook. Thus [in a scenario developed for mountain climbers] a vivid snowdrift scenario (with low visibility) may highlight the need for skin protection, goggles, food supplies, radio, shelter, and so on."

It seems that we should at least be laying out scenarios related to the possible effects of climate change -- hurricanes, wildfires, derechos and other wind storms, surprising freezes like the one that shut down the electric grid in Texas, etc. (I encourage you to read this recent article from Francis Bouchard on other ways that we as an industry should respond.) The potential for civil unrest seems to be rising worldwide. Solar storms that could fry the grid? Weapons of mass destruction? A crisis with a natural resource -- perhaps water?

There's a lot to do. I'm hoping that we as an industry can both prepare better ourselves and can help clients at least be ready to adapt when the next bit of craziness happens.

In the meantime, we can celebrate that a whole lot of hard work, plus a "supermoon" full moon and high tide on Monday, freed the 220,000-ton ship blocking the Suez Canal.

Stay safe.


P.S. Here are the six articles I'd like to highlight from the past week:

Pioneering Use Cases for IoT in Insurance

Several early adopters of the IoT have already concretely demonstrated the potential of using this technology in the insurance sector.

Insurance Ecosystems: Opportunity Knocks

nsurers must apply unfamiliar skills – customer intelligence, speed and coordination – but can achieve benefits of scale without asset intensity.

COVID-19 Is NOT an Occupational Disease

If workers’ comp becomes responsible for common conditions that affect millions every year, it is no longer meeting its designed purpose.

Unlocking the Power of ‘No-Code’

We've all seen how complex and costly enterprise software can be. "No-code" tools let non-experts quickly build the systems they need.

Key to Better CX: Think Like NTSB

Airlines are rarely held up as exemplars of customer experience, but in one important respect the industry deserves such recognition.

Tip the Sales Scale in Your Favor

Yes, relationships matter, but they're only a tiebreaker. The key lies elsewhere. And, no, it shouldn't take two to three years to develop a client.

Paul Carroll

Profile picture for user PaulCarroll

Paul Carroll

Paul Carroll is the editor-in-chief of Insurance Thought Leadership.

He is also co-author of A Brief History of a Perfect Future: Inventing the Future We Can Proudly Leave Our Kids by 2050 and Billion Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years and the author of a best-seller on IBM, published in 1993.

Carroll spent 17 years at the Wall Street Journal as an editor and reporter; he was nominated twice for the Pulitzer Prize. He later was a finalist for a National Magazine Award.