Strategies for the welfare society in the larger Europe: the insurance perspective

The future welfare scenario in the European Union is taking place after the European Union’s recent enlargement to 10 new member states. It is a welcome debate, which deals with welfare issues in the context of labour and medical research.
This event enhances the historical role of Trieste as a reference point for finance and insurance in what is known as Mitteleuropa.
The debate1 will also focus on the contribution of the 10 new EU Member States to the creation of a common welfare model. As Managing Director of Assicurazioni Generali, I am very interested in this issue as Eastern Europe is one of the main pillars of our growth strategy.
Generali were among the first western insurance companies to operate in this area. We believed in its potential even in the first stages of the transition to a market economy, when Eastern European countries were heavily affected by inflation, recession and unemployment.
Moving on to the specific theme of the conference, I am going to develop some thoughts from an insurer’s perspective, that is on the role of insurance within the welfare reform process.
Everyone knows that in Europe, both old and new, the cost of social protection is continuously rising as a result of the increasing number of people who need support and the demand for better welfare services.
Indeed, with the fall of birth rates and the lengthening of life expectancy, the fraction of elderly people in the population has increased. People are more demanding about their health. In addition, the advances in medicine increase the costs of healthcare. New cultural models have spread, assistance by family members is declining and new structures and resources are necessary to support people who are no longer self-sufficient.
The increasing pressure on welfare costs forces governments to radically rethink their social policies. This is necessary to avoid inflicting the burden of unacceptable costs on future generations and jeopardizing social cohesion and political stability.
In the pension sector, this is a global problem which affects the relation between labour and retirement. Western economies have realized that they cannot rise to the challenge posed by globalization unless people work more and longer.
In Europe, on average, men retire at 60. At this age, health conditions are generally good and life expectancy is longer than it was 20 years ago. Pensioners could therefore continue to contribute significantly to the economy instead of weighing on public finances. Abolishing mandatory retirement age, while maintaining a minimum age limit is certainly an aim to pursue.
The pension reforms started in the Nineties have increased the retirement age and introduced penalties for those who leave their jobs earlier or incentives to postpone retirement. This has so far stabilized pension costs compared with GDP, but pressure deriving from an ageing population in the future will call for new actions.
Therefore, the Four Pillars proposal, long advocated by the Geneva Association, must be a cornerstone in the welfare reform process. Retirement must not be a traumatic experience for workers, but a gradual process taking into account health conditions.
The pace of welfare reforms has accelerated in recent years, but what has been done is not enough. States will have to further reduce their role and this creates room for private funds. Private funds have to cover a wide range of risks: the risk of contracting diseases, the risk of becoming unable to work, the risk of being unable to perform basic functions, the risk of running out of money during retirement thus having no means of support, etc.
In other words this is the job of insurers. We have devoted a massive effort to meet policy-holders’ demands. Our policies are extremely flexible in terms of guarantees offered in order to maximize protection. Let’s take for instance universal life policies, which contain a dynamic management of policy-holders savings combined with death and other risk covers.
However, although insurers can do a lot, some risks still remain particularly dangerous for insurers themselves. In life and health insurance we are exposed to anti-selection, deriving from the information asymmetry in favour of policy-holders.
Anti-selection can be controlled through an appropriate underwriting policy and the use of demographic tables based on the company’s experience, but it is clear that, as long as the portfolio is limited, the variance of these tables will remain high. Therefore, it is in everybody’s interest, as well as in ours, that the life and health market should grow to improve the diversification of this kind of risk.
Our policies also contain deductibles and limitations in order to prevent insured people from taking advantage of the presence of a third payer by being too demanding for unjustified reasons. Moral hazard, which is quite common in the health insurance, must be prevented to avoid an increase in health expenditure with negative consequences on the system as a whole.

Sergio Balbinot: CEO – Amministratore Delegato, Assicurazioni Generali
1 of the conference – see programme on page 158.

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