EUROPEAN PAPERS ON THE NEW WELFARE

Chapter 7: The Geneva Association (1973 – 2001)

5. Studying the Systems for Determining the Price of Insurance
I have to suggest another point to the reader. This concerns the question of the evolution of insurance and its significance for the analysis of an essential subject: the setting of insur­ance prices as a key reference point in the new service economy.
In classical industrial economy, prices are usually fixed based on production costs so as to meet a reliable demand.
Contrarily the insurance experience has always been an “inverted cycle” in which the price has to be set based on the future occurrence of an uncertain event.
Systems for determining prices, even in the manufacturing industry, today increasingly resemble the methods used for insurance policies and are moving away from the classic, simplified “industrial” model founded on “balance.” Some costs caused by the use of products or systems (including waste disposal) actually require a judgement as to their future costs after they have been sold and used. This comes closer to how the insurer acts and thinks. This is particularly clear in the case of leasing. The increase in the cost of civil or product responsibility caused by the sale of products or services has also become a cost related to the future performance of products and systems, and so must be included when calculating “production costs”.
While the classical “industrial” economy could have as its objective a “perfect balance” in terms of price, taking into account increasingly “complete” information, the uncertainty concept is an integral part of the service economy’s theory and practice. Prices increasingly reflect a probability judgement on the future costs of usage. In these circumstances no “scientific” information can ever produce what could be considered “perfect” information. Political economics has to study much more closely how the insurance pricing system works.
This is a key reference point for the whole of economics.

6. Insurance and Welfare

Dominique Strauss-Khan and Denis Kessler were two young university economists whom I met for the first time in 1979 in a small hall made available to the French Federation of Insurance Companies in Paris, on Boulevard Haussmann. It was impossible to imagine at that moment that in the 90s DSK would become a minister in the Jospin government and today President of the International Monetary Fund in Washington; DK was to become Presi­dent of that same Federation and is now president of SCOR, the leading French reinsurance company.
At the time I was suggesting and soliciting studies on social vulnerability, in the first instance those relating to pension systems. Following debates in the Club of Rome, and above all my analyses on the fact that the slowdown in growth would be a long lasting phenome­non, it seemed clear to me that this would cause long term problems for the maintenance of state pensions based on distribution at the levels then in force. The problem of the increase in life span was also beginning to appear on the horizon.
Today, after three decades of experience one has become accustomed to considering a 2% growth a good average. In the first half of the 70s governments (and the economists who advised them) saw it as a crisis rate, and that it would return to “normality” at around 6%. From this sprung a whole series of economic policies based on debt that the future “normal” recovery was to pay back. And so an increasingly high level of inflation arrived. Even in Switzerland it rose above the 10% threshold and in some European countries it exceeded 15 and even 20%.
It was, as was said at that time, “stagflation” (stagnation because real growth was around 2-3% with strong inflation). Neither governments nor experts were prepared to consider the very simple fact that it was a problem – at the end of the day a classic one – of relative rigidity of supply, linked to changes in production structures. In official circles it was customary to test the demand and one did not dare acknowledge that science and technology weren’t a magic wand capable of transforming production conditions according to necessity and in the short term.
To me it seemed urgent therefore, that studies be begun to assess the importance, for families, of all their available financial resources: private savings, life insurance, personal property and real estate, safety and social welfare. As to insurance companies it was a matter of better understanding their role. I had in mind a study carried out at Battelle to determine a strategy for developing the beer industry: it had started from the idea of discovering the “added value” of all drinks in relation to tap water. In a bar one can choose a glass of beer, wine, mineral water or coffee. One could then consider the development of beer just in relation to all the possible alternative drinks. Afterwards it was also possible to make an accurate analysis of the different types of beer.
It was natural at first, therefore, at least as a first step, to take stock of life insurance in relation to families’ disposable resources in the field of state insurance. As usual before entering into discussion with the experts, I took up my pilgrim’s staff and went off and experienced several surprising situations.
At that time in most texts on private life insurance social insurance was ignored. At most there were some annexes on the subject.
I went to meet a professor of insurance at a famous university and I asked him about his relations with the teacher who dealt with welfare: “I don’t know him”, was the answer, “I work here on the first floor and I believe he is on the second”. The reasoning of the strategic studies on beer had not reached there. But in this field, of course from the mid-80s, there was a real revolution. Studying the various forms of welfare, comparing them, adapting them, had become a serious affair for a large number of research centres, consultants and universities. It was amusing – and useful – to have lived this first period “Buffalo Bill style”.
Before 1980 I had therefore promoted a whole series of small studies in England, Germany and Italy (and later in other countries), to stimulate the comparison between private insurance and public and private welfare. The study left its deepest mark in France, thanks to the quality of the researchers, Dominique Strauss-Khan and Denis Kessler. They were known for their research on family property and its composition. It was a good basis. Then they had studied and worked closely with a Nobel recipient for economics, Franco Modigliani who had shown how, over the life cycle of persons and families, the composition of property and hence of all their financial resources changes. It was a perfect starting point. They knew private insurance a little less, but were ready to learn. Following the “Battelle method”, I encouraged them to consult as large a number of experts as possible, above all those within insurance companies, in order to hone their knowledge of this sector.
In every research, even the most “quantitative”, one must develop what the English call “feeling” for things or the German “Fingerspotzgefühl” (feeling things on the ends of one’s fingers).
It is also interesting to remember that, in the great majority of the studies for the Geneva Association, I turned to external experts from other sectors, involving many possible specialists from industry, other financial services and public institutions. At the same time, I insisted that everyone should speak about them with insurance professionals.
It was a question of knocking down the barriers and falling on one’s feet. It was also a way of making everyone understand that insurance was becoming increasingly economically important for all.
The Strauss-Khan/Kessler study was published in 1981 under the title “Savings and Retirement – the future of pre-financed pensions” and contributed to launching and establish­ing this debate for many years. Denis Kessler would later continue to complete and update this core study.
While remaining in Paris, he was the Deputy SecretaryGeneral of the Geneva Association for almost two years before being appointed president of the French Federation of Insurance Companies. It was his interest in understanding risk management in every field as an impor­tant economic problem that stimulated and motivated him even after he became the Head Economist of MEDEF, the Movement of the French Enterprises.
The explosion of discussion on the reform of all the social systems in most countries changed the Geneva Association’s field of action. The interests of insurance were taken into account by the companies themselves and by national and international associations whose scope was to defend the sector’s specific interests. The Geneva Association could not and cannot try to understand, beyond the interest of the insurance sector, where the most impor­tant themes for the future of society lie, without prejudice or taking “political” positions. The Association therefore became a means of exploring, of anticipating, and also proof of the indispensable opening of the world of insurance to the great questions and problems of the modern world. The importance of everything relating to modern insurance renders this evolution indispensable, and is translated into absolute transparency. At the Geneva Association there has never been a single classified or confidential study, single report or information. Everything is available to everyone seriously interested in its work.
This attitude has been quite useful in establishing the Geneva Association’s credibility, particularly in relation to the world beyond insurance that had to understand that highlighting the importance of managing risks of every kind was not simply a public relations problem for insurance companies, but a very serious question for the interests of everyone in every activity, in every sector, public or private. I had the satisfaction of receiving this comment from Jean-Claude Trichet, Governor of the Bank of France, and later of the Central European Bank, when I put the Geneva Association’s activities to him in these terms, on the occasion of the Group of 30 meeting in Washington: “It’s a very intelligent way of defending insur­ance’s long term interests”.


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