EUROPEAN PAPERS ON THE NEW WELFARE

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

Moreover, risks can change over time and quoting risks may be difficult. Let’s take annuities, for instance. Insurers are exposed to the longevity risk, a systematic risk which cannot be minimized by diversifying portfolios, so it may have devastating effects on an insurer’s balance sheet.
In the last few years we have witnessed the lengthening of life expectancy. In order to calculate the value of annuities, companies have to use projected mortality tables. This poses a further risk for insurers, in addition to that of stochastic deviations: the risk of getting the estimated life expectancy wrong.
The insurance world has to be strictly connected to the scientific one. Only thus can we understand or rather prevent any impact that the development of scientific knowledge may have on our business. The new frontier is represented by genetic research which can potentially change the insurance scenario through its effects on human life.
The annuity market is still underdeveloped, but is set to grow in the future. This business will grow in the countries where the law ties tax incentives to the conversion, partial or entire, of the accrued capital into annuities. This is the case in Germany and Austria, where the accrued capital must be fully converted into annuities, and in Italy, where the capital share to be converted must be at least 50%.
In the countries which grant the saver freedom of choice, the growth of the annuities market is hampered by the fact that savers are convinced that they receive from the state more than it can offer in the future and that there are psychological barriers to the conversion of a definite, tangible, usually large, capital into an annuity for life.
Another important aspect to be considered here is the management of households savings. Life policies are flexible and include different lines of investments in order to meet savers’ requirements in terms of risk aversion and length of investments. Policy-holders can switch their investments from one class of assets to another according to changes in their needs during their life cycle.
However, if we focus on pension funds, we must bear in mind that the primary aim of supplementary funds is ensuring that an adequate standard of living is maintained throughout retirement. This means that there is no room for risky investment policies.
In some countries financial guarantees are mandated by law or are often demanded by the policyholders themselves who are thus certain of their future standards of living. These guarantees pose serious risks to insurance companies. If the financial management cannot achieve the expected returns, the company has to resort to shareholders’ money.
Therefore, financial guarantees must be consistent with the opportunities offered by financial markets: there is no point in making promises which cannot be kept.
This implies that investment strategies cannot be separated from obligations towards policyholders. In this respect, the insurance sector has developed ALM models which allow a fine-tuned co-ordination between technical and commercial strategies on one hand and the investment policy on the other.
European legislation encourages insurance undertakings to better control their risks in order to maximize complying with obligation to customers. Given the positions which have emerged in the EU works on the new solvency margin, Solvency 2, insurance companies will have to meet more risk sensitive capital requirements.
During these works, the idea was that the statutory capital may be determined following general rules or, alternatively, by using internal models of risk assessment. In other words, the companies using those models will be able to reduce their capital requirements and, as a consequence, capital remuneration costs and, as a final result, the costs of products.
As for the latter issue I would like to add some words on the role of insurers in the financial markets and savings accumulation. The specific characteristics of the insurance business have stimulated financial innovation both in terms of demand of new financial instruments — which have to be coherent with liabilities — and products offered to policyholders. Insurers have launched on the market products with minimum financial guarantees, for instance the reimbursement of premiums paid at the end of the accumulation period, and a yield linked to a specific index.
Insurance has also greatly contributed to the growth of financial markets as a result of the huge amount of savings managed by insurance undertakings. Currently, European insurance undertakings are managing assets for something like 4 trillion euro, half of the GDP of the area, an enormous sum of money which gives witness to the importance of our sector in the economic world.
Let me stress another aspect of our role as insurers which may sometimes pass unnoticed.
By offering advice on a daily basis, our financial advisors contribute to raising our customers’ awareness on the need to protect themselves from risks. Workers’ expectations concerning the ability of the welfare system to offer adequate levels of protection in the future continue to be too high. This is the reason why some European governments have launched informative campaigns aimed at promoting supplementary funds.
If we were to use the famous “invisible hand” metaphor, we could say that the interest of insurers to make profits corresponds to the interest of customers. For us, making profits means establishing long-term relations with our customers in order to have a stable portfolio and this can be achieved only through high-quality advice and services.
Through the action of insurers in increasing customers’ awareness about the risks they run, more resources are available in the system, part of which can be used for scientific research in the medical field. This is, for instance, an aspect which distinguishes Europe from the United States: although the American health care system is not appropriate for us for a whole series of social and cultural reasons, undeniably, medical research is more advanced overseas and this stems from the fact that research institutes have more funds in the US.
To conclude, insurance is at the heart of the changes taking place in welfare systems in Europe, both old and new, as I said at the beginning. We can play a crucial role in the modernization of welfare states, stimulating savings accumulation, increasing protection against risks, contributing to innovating financial markets and gathering new funds for medical research.
However, ultimately our efforts will be successful only if all the players involved in a country — politicians, the economic and scientific community — jointly strive to improve social protection and the population’s living conditions. It is our moral duty to offer our children a social model that may protect them from any risks and an environment in which they may progress as we did thanks to our predecessors.


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