Latent Hazards

Short-termism and over optimism is dangerous.

When our political masters deal with the big ticket risks we face and formulate new legislation or ways to deal with the risks, they would do well to look carefully at the business models of Lloyd's and our successful UK insurance industry.

There are risks which are capable of being assessed in terms of: the likelihood of a loss or bad event happening, and the size of the pay-out. These are the bread and butter of the insurance industry. Where the risks and / or the pay-outs increase the insurance industry simply jacks up their insurance premiums. The focus then moves on to how the rate of claims and pay-outs can be reduced. The motor industry is a good example. The introduction of seat belts, breathalyzers, no claims bonuses, MOTs have all helped reduce risks and insurance premiums. Prevention saves money, frequently costs not a lot, but the beneficial effects may take many years to show through, so the action is put to one side (e.g. tackling the causes of obesity).

Then there are the big ticket items, the catastrophes, where the likelihood of the disaster happening is very small, but if the event were to occur the pay-out would be massive. The long financial tail of these potentially large liabilities in practice are reinsured.

It is the management of the risks where when things go wrong; the potential pay-out is simply too big, the economic damage is too large, or the social costs are too high, which politicians seem to misjudge. And they do not have the luxury of reinsurance. Perhaps it is the 5 yearly political cycle that makes politicians focus on the short term and do little about reducing or mitigating the big risks.

Things which could go wrong big time, and cause the country massive damage, but where the likelihood is very small are seemingly put on "the to do list". Examples of "we know there is a problem, we will sort it out later" seem to be:

=> UK energy shortfall
=> Flooding of London and other key areas
=> Nuclear waste

Five years ago the country's finances were strong and the costs of large disasters / set-backs could be taken onboard. But times have changed. Now public finances are stretched to the limit and it would be difficult to find the money to meet the financial cost of a catastrophe.

To hope very bad things will not happen and therefore do little about them is short-sighted and risky, even foolhardy. Perhaps there is much activity going on behind closed doors? It is hard to tell, but I don't see signs of this happening in a serious way.

Then there is: "we will cut the budgets, but we won't undertake a review to determine what is a must have and what is a luxury".

A significant reduction in the unit of resource has occurred in many areas, for example:

=> Armed forces
=> Universities

It is much trumpeted that the overall spend has increased year on year. This is true, but the volume of activity undertaken has increased at a faster rate. So in reality there has been a significant reduction in the unit of resource.

The position is made worse due to the difference in the inflation rate for individual citizens and those receiving the funding. I have seen it reported that the cost of keeping our service men and women properly equipped and supported rises at 3% above the rate of inflation. Contrast this with a funding rise of 0.5% per annum. At the end of a 12 year period this results in an effective cut of over 30% in terms of what is being paid as against what should be paid for the armed forces to financially stand still.

In contrast the unit of resource at the NHS has increased significantly, but this we have to ring fence!?!

It is all down to the allocation of scarce resources. Ring fencing causes financial distortions. How for example is body armour to be ranked against fertility clinics, or sending out leaflets on stress? There are a large number of must haves, lots of we need this in a civilized society, but over the years there are many, many things that have crept into the public spending which are luxuries or beyond what we can afford.

One hopes that the new Government will take an informed and longer term view. And will identify the "we must have it" and the "it is essential to our long term success", and the "we don't need it and can't afford it".

Am I right in believing that politicians are increasingly driven by short-termism?


For a crime thriller with political intrigue visit: www.latenthazard.com