Take a WWII perspective on Risk

Looking at risk differently is a crucial part of business governance and protection. As business insurance brokers it is our job to help our clients first and foremost assess where the real risks are to their business. We set the Big 4 as top line areas that need protection whilst navigating the risk minefield:

  1. Balance Sheet
  2. Cash Flow
  3. Business Reputation
  4. Directors Personal Assets

This is of course, easier to do than it sounds. Commercial risk is complex and extensive. We once worked out that a business faces over 300 different areas of risk. Combine that with each insurance policy that protects them being on average some 26,000 words or so long and it takes a fair bit of work, time and patience to ensure our clients are correctly protected.

Looking at risk is an interesting concept. Many companies that we audit have looked at risk pretty much the same as when they started in business. The world of business is a rapidly evolving, inter connected, global marketplace though and risk changes quickly and significantly. If a company has never suffered a large complex loss how do they know their insurance cover will protect it when one occurs?

Looking at risk differently is very important.

During WWII, the US Navy tried to determine where they needed to armour their aircraft to ensure they came back home. Too many were being lost on bombing raids. They ran an analysis of where planes had been shot up and came up with this diagram (shown above).

Obviously, the places that needed to be better armoured are the wingtips, the central body, and the elevators. That’s where the planes were all getting shot up.

Abraham Wald, a statistician, disagreed. He thought they should better armour the nose area, engines, and mid-body. Which was crazy, of course. That’s not where the planes were getting shot.

Except Mr. Wald realised what the others didn’t. The planes were getting shot there too, but they weren’t making it home. What the Navy thought it had done was analyse where aircraft were suffering the most damage. What they had actually done was analyse where aircraft could suffer the most damage without catastrophic failure.

All of the places that weren’t hit? Those planes had been shot there and crashed. They weren’t looking at the whole sample set, only the survivors.

‘Beware the Minefield’ by always challenging the way you look at risk.

 

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