The smartest guys in the room

During my extended engagement, I got into an interesting exchange that, to oversimplify a bit, questioned whether banking/finance people were smarter than insurance people.

The banking advocates, of course, point to the enormous salaries the industry pays and how they attract PhD’s from the “best” schools. I counter that the smartest people are too complex to be motivated primarily by money and prestige. I also point to the quality of banking models (they seem yet to discover the lognormal curve).

I guess I could also point out that the last financial crisis sank the banking sector while leaving insurance more or less intact and that the actuarial exams were too tough for Milton Friedman, who ran away and instead won a Nobel Prize in economics.

As further evidence, I can now point to this Aon table. It compares volatility of the insurance market with volatility in the stock market:

Aon compared the variability of loss ratios over the last 20 years with the variability of the stock market (measured by the VIX – the CBOE volatility index) over the same period.

The typical stock market is about as volatile as commercial auto – one of the tamer lines. Homeowner insurers experience the sort of volatility the stock market saw when the ruble melted down. (Recall that’s the event that took down Long-Term Capital Management and almost triggered a worldwide financial collapse.)

I pass this along because I think the rest of the financial industry could learn a lot from property-casualty insurers, particularly in the realm of capital modeling.

The P/C industry is routinely more volatile than the stock market’s craziest days. What makes Wall Street shudder is, for P/C insurers, another day at the office.

(H/T to JL.)

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