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Changing risks

Changing risks

Zain Jaffer is a real estate and property tech investor who sold his mobile ad startup Vungle in 2019 to private equity firm Blackstone.

A March 2024 media release by US insurance giant State Farm stated that they would not renew 30,000 California homeowner and 42,000 commercial apartment owner insurance policies, but said that renters insurance for these properties would not be affected. The reason given was their financial health as well as proposed changes to California insurance laws, which would make the cost to benefit ratio untenable on their end.

Developments like these catch my eye because I am a student of risk and strategic management. Famous examples of where senior management got strategic changes and risks wrong are with examples like the Blockbuster Video to Netflix shift, the Nokia to Android/Apple shift, and others.

Whether we know it or not, we humans are hardwired to reassess risks and act accordingly when we see it. This is perhaps an outgrowth of our need to survive if we sense there is danger, even going back as far as our caveman days. 

Business is no exception. Like personal safety risks, the risks in business can also cause us harm. Maybe not physically, but at least economically for the income and assets we accumulate for ourselves, our employees, and our families. Suffice to say as CEOs and Presidents, and members of Boards, we need to recognize when a major shift has occurred.

Some say that we need to quantify risk. If we can, and if we can use data and actuarial science (e.g. statistics) to assess if something has changed, then let’s do that. But for many businesses, they just rely on a sixth sense that something has changed. Maybe they cannot quite put a finger to it, but they know when something is not working or there may be a hidden danger somewhere.

Whether it is a quantified or perceived danger, let us take these things seriously. Table it as an agenda in your weekly or strategic meetings and discuss it. It is normal for people to dismiss anything out of the ordinary, so if you are not the decision maker and need to make a compelling and convincing argument, you will likely need data to support your assertion.

In the markets for example, although these are not like situations in the wild where you sense that there is a dangerous animal nearby, events such as the recent April 2024 missile attack by Iran on Israel will warn experienced traders that there will be a panic selloff, not just in oil futures but in many traded instruments. Others, such as interest rates, do not change as much during these types of events, but these do change in a planned way.

We face risks everyday even when we cross the street. But as we go through life we find that we can react to most risks if we are familiar with the signs that warn us those risks are imminent.

The problem is if something has changed drastically we have no reference point. So we need to be careful out there, and learn instinctively with or without complete data, when it is time to shift direction.

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