London Market Monitor – 31 December 2021
Learn more on Solvency II discount rates, and the state of the local and global markets at month end.
His theory is that, compared to Econs, humans do a lot of misbehaving, meaning that economic models make a lot of bad predictions. Econs make perfect choices, optimising each decision; humans sometimes (often?) choose the easy way out. So here’s my question: are we imagining similar fictional humans when setting risk management policies?
Take the recent fuel crisis—an example that ended in Boris Johnson needing to send in the military to help. On Thursday 23 September 2021 BP warned that it had had to “temporarily” close a handful of petrol stations due to a shortage of lorry drivers.1 By the weekend panic had struck and petrol stations were experiencing unprecedented demand for fuel, with some stations reporting fuel that usually lasted three or four days being sold in 24 hours.2 According to The Guardian, the panic even resulted in five times as many people filling up with the wrong type of fuel.3 What wasn’t a crisis very quickly became one due to a perceived shortage, but also due to human response to scarcity.
The fuel crisis reinforced the importance of operational resilience. Operational resilience is an expansion on business continuity requirements, with a focus on preventing disruption to customers to the extent practicable. It’s about being able to continue providing vital services in the face of adversity, returning to normal operation as soon as possible, and learning from disruption and near misses. Both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published their expectations for initial implementation of operational resilience regulations by 31 March 2022 in SS1/214 and PS21/3,5 respectively. These center on identifying important business services to customers and ensuring these services can be delivered even during times of business interruption.
Operational resilience is an expansion on business continuity requirements, with a focus on preventing disruption to customers to the extent practicable.
Consider the events over the last few weeks and the operational lessons that can be learnt:
Learning from disruption is an important element of being operationally resilient. Luckily for most of us these big opportunities to learn may be few and far between. Therefore, it would be a mistake not to take our lessons from other sources. What the fuel crisis can teach us is that disruption could come from processes that are taken for granted and seem at first insignificant in the bigger picture. That it may not be possible to foresee every disruption to important business services, but monitoring key indicators might just avoid bigger problems and ensure customers can still be served. Additionally, when operational disruptions do occur, it is naïve to assume that people will respond unemotionally.
1 Smith, O. (23 September 2021). BP closes some sites due to lorry driver shortage. BBC News. Retrieved 1 November 2021 from https://www.bbc.co.uk/news/business-58645712.
2 BBC News (28 September 2021). Petrol supply: Bunny station manager urges halt to panic buying. Retrieved 1 November 2021 from https://www.bbc.co.uk/news/uk-england-nottinghamshire-58723600.
3 Topham, G. (27 September 2021). Petrol station chaos worsened by motorists filled up with wrong fuel. The Guardian. Retrieved 1 November 2021 from https://www.theguardian.com/business/2021/sep/27/petrol-station-chaos-worsened-by-motorists-filling-up-with-wrong-fuel.
4 Bank of England. Supervisory Statement (SS) 1/21: Operational resilience: Impact tolerances for important business services. Retrieved 1 November 2021 from https://www.bankofengland.co.uk/prudential-regulation/publication/2021/march/operational-resilience-impact-tolerances-for-important-business-services-ss.
5 FCA (29 March 2021). Policy Statement (PS) 21/3: Building operational resilience. Retrieved 1 November 2021 from https://www.fca.org.uk/publications/policy-statements/ps21-3-building-operational-resilience.
6 Camp, J. (11 June 2012). Decisions are largely emotional, not logical. Big Think. Retrieved 1 November 2021 from https://bigthink.com/personal-growth/decisions-are-emotional-not-logical-the-neuroscience-behind-decision-making/.