Sunday, February 9, 2014

One Stroke (in Time) of the Lutine Bell

The French frigate La Lutine was six years in His Majesty’s Service following its surrender at Toulon in 1793.  Passing the Dutch coast in 1799, she sank and with her about 1 million pounds worth of gold and silver and her bell.  Long after her economic loss was borne by the Lloyd’s underwriters, her treasure was located and, much of it salvaged.  Most cherished of the salvaged wreck was the ship’s bell.  This bell – along with thousands of bells – once served the important role of insuring that everyone knew that something important had happened at the same time.  As church bells summoned the faithful to assemble, so the Lutine Bell summoned risk takers to account when a loss at sea was confirmed.  If the Lutine Bell rang once insurers knew that an insured loss had occurred as a ship’s overdue status had been confirmed as a sinking.  Ringing twice, the bell provided good news that an overdue ship was just late and had in fact delivered its cargo.

Edward Lloyd, the coffee and maritime gossip house proprietor on Tower Street in London was known more for his quality of shipping intelligence than his coffee.  From a reward for a missing chestnut mare believed to be taken by a man with “black curled hair” with “Pockholes in his face” published in the London Gazette 326 years ago this month to the more important news of shipping movements and calamities, Edward knew that he could sell more coffee if his place was seen as the most reliable source of news of the day.  As the bloody 18th century opened, the speculation on shipping losses became big business.  With the seas boiling with perils – pirates, battles, faulty maps, storms, shoals – the frothy wagering on the fear of loss became one of London’s most celebrated markets.  In less than half a century, underwriting activities at Lloyd’s had become so exotic and speculative that the London Chronicle described the fever pitch of “illicit gambling” at Lloyd’s as “the melancholy proof of the degeneracy of the times.”  Those who understood the significance of disciplined, intelligence-based underwriting abandoned the debauched coffee shop and set up a new operation (complete with coffee) at Pope’s Head Alley in 1769 – just in time for the Atlantic to explode with cannon and cutlass.

There is something particularly fascinating in the colorful history of the birth of modern insurance.  Edward Lloyd knew the value of reliable information and used it to sell coffee to speculators.  John Julius Angerstein, the rate setting moral icon of Lloyd’s in the 1770s, knew that getting a jump on everyone else’s access to information was even more important.  Like the infamous Napoleonic wartime knowledge advantage that gave the Rothschilds their control of the banking system, Angerstein’s intelligence gathering collaboration with the British Navy cemented the unrivaled dominance of Lloyd’s in the market.  It’s not surprising that the 1820s competition to Lloyd’s came from Nathan Rothschild!  And while the tolling of the Lutine Bell was an essential form of leveling information asymmetry – everyone knew the conclusive facts at once – the most successful underwriters actually realized that timing of knowledge was more important than the knowledge itself. 

And here is the subtle fascination I have with this seemingly pointless, obvious fact.  Insurers, like today’s high frequency, low latency quantitative traders, exist solely based on an anomaly within our ‘civilized’ societies – a willingness to reflexively pay for the illusion of time.  When it comes to monetary-associated events, our behaviors are more similar to a reflex then a cognitive process. 

Now let me diverge for a moment for those of you who did not sit through Dr. Bruce Craig’s neural physiology lectures.  Peripheral nerves in the skin and soft tissue do a great job of triggering digital (on / off) responses.  While they are constantly stimulated, they do not trigger a response until there is sufficient stimulus at which point they have an “all-or-none” consequence.  When they fire, the neurons rush information to the spinal cord which immediately and dramatically links sense to muscle stimulation which again acts in an “all-or-none” fashion.  When you touch a hot stove, for example, your recoil is not carefully considered.  Rather it is instantaneous and reckless.  Your brain finds out about your reflex as a completed event and has no time to override the muscle response.  Considered, organized cognitive motion, in contrast, synthesizes numerous inputs – vision, distance, wind, sound, balance, capacity – and then formulates a recruitment of activation which can anticipate outcomes and then orient efforts to manifest them.

We know that events perceived to be adversity will happen throughout life.  We’ve been advised that speculators (known as insurers) should be paid a “premium” (ironic in its common derivation to the concept of a reward for a game of chance) for taking an ‘unknown’ tomorrow’s risk today.  And we know that, in most instances, when ‘bad’ things happen, these entities actually pay what they’re contracted to perform.  Societies’ willingness to transfer money to surrogates of accountability has become a ubiquitous feature of our current system.  And these surrogates actually respond – like spinal reflexes – in a timely fashion (most of the time).  But this too, is interesting. 

The Lutine Bell’s single strike meant that it was time to pay for a loss.  Everyone who had been paid to take the risk was now called to account – immediately.  Famously, Cuthbert Heath, a famous property and casualty underwriter from Lloyd’s who insured properties in San Francisco at the time of the 1906 earthquake paid not only those who had earthquake damage but paid, “all policyholders in full, irrespective of the terms of their policies.”  And herein lies a more interesting temporal nature of how the system ‘works’ for the surrogates.  By creating a near instantaneous settlement – like the spinal reflex – the societal ‘brain’ is informed of the completed event (loss and recovery) rather than taking the time to consider premiums paid to claims made.  And this time function is as, or more, important to the reinforcement of the denomination of risk than the timing of information referenced above.

An insurer and a quantitative trader are like highly refined spinal reflexes in our monetary system.  Their intelligence gathering has to involve a long-arc synthesis of observations that anyone could make but few do.  They need to be sensitive in the periphery and be masters of subtleties in large volumes of information deemed too tedious to occupy the average person’s attention.  Then, they need to modulate their behavior to evidence immediate capacity to perform – pay a claim or execute a trade – drawing as little attention to the proportionate scale of inflows and outflows as possible.  If these two dynamics are managed well, profits are amassed.  And with complex computational models which have mapped humanity’s behavioral reflexes with hyper-evolutionary efficiency, those who have sensed the most over the longest observational period will always have the coffee-house advantage. 

What I find ironic is the absence of a counter-narrative.  The model of Lloyd’s has profitably traded on temporal human reflexes surrounding loss for over three centuries.  The core principles which make insurance and quantitative speculation work have evidenced greater continual profitability than any other venture without significant government intervention or support.  In other words, We The People have predictably behaved around fear of property and life loss more consistently than we’ve done much of anything else.  So what would a system look like if it was built around presumption of resilient access to abundance?  What if our starting position was that we’ll be fine no matter what?  What type of transactions would be structured and traded around the ability to participate in the productivity to come?  I’m not talking about speculative futures which themselves were a form of insurance against future price uncertainty; I’m talking about real shared alignment against known, model-able, persistent enough.  What would accounting look like if we didn’t see a binary world of ‘gains’ and ‘losses’ but rather we saw a world of interdependent sufficiency in which wealth was informed by our ability to access resilient capacity rather than surrogate future ‘uncertainty’?  The answer is that it looks a lot different, and last night, in a coffee-shop in London, that future was born.  Ring the bell twice!  We're heading into turn two!


1 comment:

  1. For all you Integral Accounting readers, take a look at the amazing interview I did with Sean Stone


Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave