Donald Rumsfeld said “You need to know what is known about was is unknown so you know what is unknown” On first “blush” the statement appears contradictory and obscure. Is it the ramblings of an ageing commander spruiking flawed statements of fleeting logic?
His statement is remarkably relevant to the insurance Industry. We need to know what is not known (claims incurred but not reported) so that when financial statements are prepared adequate provisions are made for what is not known. How do you know what is not known? You need to know from previous trends and pre-existing conditions what is likely to occur (what is unknown) so that in the end you know what is unknown. If you don’t know what is unknown you will make inaccurate provisions that will result in either over stated or understated financial results compared to the actual results when all of the claims years have been finalised.
This is what is known as disclosure.
What has been disclosed in the accounts of Back To Basics Cover . Well the MD has predicted a profit increase of 50% this year. Does he know what is unknown? The pre-existing conditions are predicted to allow a continuation of the prior unrest and changed world perception of increased risk. Greater provisions need to be made in this era of heightened uncertainty and it is easy to justify this to cautious auditors who agree with increased provisions to cover the uncertainty impost justifiable in their minds that are already converted to this new world thinking.
Eventually the actual trend downward on risk exposure must emerge and get ready for some real big surprises. An increase of 50% in profit may well be a rather poor result if you now know what is not known. As an investor you need to know what is unknown about your stocks so that you know what is unknown about all of your investment.
Please comment immediately that you now know what is not known so that I can “rest easy” knowing you know what you previously did not know about what was not known.