EUROPEAN PAPERS ON THE NEW WELFARE

Chapter 7: The Geneva Association (1973 – 2001)

7. The Four Pillars Strategy
Having contributed to the initial awareness of the delicate and very important question of the adaptation of the Welfare State to the conditions of contemporary society, The Geneva Association turned its priorities to other subjects. As usual, when we have suggested some topics some people were wide eyed.
The first project on the four pillars strategy goes back to October 1988. I started from the observation that, apart from a few exceptions, lifespan, in every country in the world, was tending to increase as never before. And in particular this lengthening of life could not be considered a scourge (“society ages”) but rather, in a much more realistic and positive way as the addition of ten or twenty years to an active life, in a reasonable state of good physical and mental health. And so progress for society therefore, passes increasingly through a good integration in the daily life of the vast majority of the population, at least until the 80s. As a consequence there was a need for the whole life cycle to be adequately reconsidered, subject as it inevitably was to a new division of functions and time of learning and work.
This would have to be modulated according to age, starting from a part time basis to full time or more. Part and full time can vary however depending on circumstances and how society evolves. A century ago, full time could mean 80 hours and more a week. Today one can start from the idea of a working week of 36 to 40 hours. In a service economy, however, we increasingly need to assess non-paid time which for now is not taken into consideration for economic statistics, especially those that compute value.
The Four Pillars comprise: public insurance, private insurance linked to work, individual savings and investments and work (at half time, beyond minimum pension age).

8. The Costs and Organisation of Health

Another very important question is currently the subject of the Geneva Association’s deliberations. It concerns the costs and organisation of health. In an increasingly longer life cycle, it is clear that health costs (which increase to allow us to live better), are very unequally spread over age bands. In other words the “repair cost” of the human body after 50 or 60 years increases considerably. Social justice depends on the dominant political vision in a society. It is also essential that sufficient resources be accumulated throughout life in order to consequently sustain the expenses of the oldest, adding the cost of those who are no longer self-sufficient.
This implies setting up personal and collective reserves (private and public) to deal with the situation, and bringing the health insurance and pension insurance sectors closer together. In certain cases and in certain conditions the two could even be combined. The best solutions can only be found through research and discussion between the interested parties.
One starts from a realistic assessment of health costs, present and future, and from the best policy to follow on economic and social relations between generations.*

9. Insurance’s Own Logic
Kenneth Arrow, Nobel Prize recipient for economics, explained the insurance business in these terms: it’s like going to the bank, with the difference that when you pay money at a counter you can withdraw your capital in line with the terms of deposit, while in the case of insurance, the capital is withdrawn on condition that an event against which you are insured, happens. In English it is a “conditional claim”. Simple, no? On this basis financial economists, and there are many of them, have been wrong in thinking that, since they know everything (or almost) about banks, they do not have much to know about insurance. This is an inadequate view.
To begin with, money withdrawn from an insurance company in the event of an accident is available mainly thanks to the organisation of an insurance scheme which is the function of every insurance company, whether it is a mutual or a proprietary company. It collects premiums from those who are subject to a similar risk in order to pay those who suffer the consequences of the unexpected event.
Secondly, insurance often does not pay a pre-determined cost, but the real expenditures (within certain limits) rising from an accident. So payments are not strictly based on the nominal value of money but on that of the things to be replaced or repaired. In life insurance too, account is taken – at least in part – of the fact that there must be a guarantee of capital or long term yield sufficient to ensure real purchasing power in a future that can be very distant. From this comes the importance, to insurance, of limiting inflation as much as possible.
The rest of the financial world that almost always bases its calculations on the nominal value of money, aims at earnings that very often are short term. Statistics on a nominal basis can suffice.
For insurance it would be wiser, perhaps, to make more frequent use of real base statistics that take account of the purchasing power of money over time.
There is one point on which insurance is really different from the bank and from any other economic activity: it is the establishment of reserves for paying out on commitments that can arrive at up to thirty, forty years and beyond.
In the manufacturing industry it is not unusual that a large company can have short term cash flow problems, even though it is flourishing. Contrarily a technically bankrupt insurance company, i.e. one with insufficient reserves to meet all its future commitments, can continue to be in liquidity for 10 or 15 years. In the case of a bankrupt insurance company on which we created a simulation, a lack of liquidity would be felt only after 17 years.
This situation is practically and psychologically incomprehensible both to a banker and to an industrialist. It is on this very point that one can find a deep divergence of mentality between the heads of insurance companies and the others. In insurance one needs to be very conservative, to defend and protect, as best one can, important reserves for the long term. Bearing in mind how little knowledge on insurance economics is taught at an institutional learning level, those in charge in this sector often come to the conclusion that, while publish­ing explicit financial reports at the end of each year, they shouldn’t overwhelm the appetites of all the world’s sharks. And there are plenty of sharks.
Every so often, some managers from banks or industry, more casual than others, realise that insurance possesses reserves managed – fortunately – very conservatively. Then, notwithstanding the surveillance mechanisms, danger arrives. Over twenty years ago, in three European countries, Italy, Spain and Norway, some important insurance companies (La Fondiaria, el Phoenix Espanol and Norden Storebrand) came to harm because some entrepreneurs thought it opportune to give the insurers lessons on business spirit. In order to maintain their reserves, companies need an efficacious control system but also – perhaps most importantly – a spirit and ethics up to the mark.
Concerning this I would like to provoke the reader a little. It is often said that the image of insurance is generally mediocre. I have had enough experience in many economic sectors to say that bad habits and reproachable behaviour are pretty widely and evenly distributed everywhere. Insurance suffers from two handicaps in particular: on the one hand it represents a sector – forgotten by economics – considered under tow to others and with no great future. On the other, insurance is easily manipulated by the insured.
In the first case the reality of the modern world should do justice to this reputation. In the second it is interesting to read the book, The Hidden Bankers which was released to the public at large with the idea of confirming dubious insurance operations. A number of these do exist, but no more than among car sales companies. The fact is that in seeking out bad actions on the part of insurance this book has brought to light a series of facts that demon­strate how much it has to put up with unjustified requests for regulation (which, of course have repercussions for premiums, something that shows that insurers too would sometimes have an interest in having stricter behaviour).
How many times in a garage, is advantage taken of an insured damage to add other ex­­penses that have nothing to do with the accident.
At least 20% of fires are caused in order to get access to insurance money, without any accident having occurred. This rate varies from country to country, but the phenomenon occurs everywhere, and that does not include those more violent cases or those which come within the area of real crime.
A senior insurance manager must actually spend an important part of his time in studying the statistics relating to damages to find some irregularities that often indicate suspicious behaviour. In some cases at least, one might think that the aggressive approach of some insured persons could be the result of their guilty conscience. This clearly does not make up for the errors that some countries have tried to remedy by setting up an “Ombudsman” service, tasked with objectively assessing claims.
Right from the moment when an insurance policy is purchased the insurer is faced with the problem known to economists as “antiselection” in the area they call “asymmetric information”. It was for this concept and reality that Joseph Stiglitz was awarded the Nobel Prize for economics. What it refers to is as follows. It is tempting for someone who knows he is about to die in two or three years to take out a life insurance policy for his family, hoping that the insurance company will not find out about the expiry. The same applies to someone who would like to insure a car knowing very well that it will break down immediately. The insured person knows the condition of what he wants to cover better than the insurer (hence the expression asymmetric information: one party knows more than the other).
A private insurance company must ensure that every risk covered is done so at a true cost, and not fall into subsidising those who hide the fact that they carry more serious risks than those for which policies are issued. Justice demands that all the insured are treated in the same way. For those who are unaccepted (a seriously ill person who is about to die) there must be some compensation or help from the State or from the community as a whole. In such a case we should all agree to contribute through the tax system but not by means of an insurance policy. In the one case there is a tax levy and in the other a premium. To confuse the two is economically and socially unacceptable.
As can be seen risk and vulnerability management is fairly complex. It deals with all the economic and psychological mechanisms of human behaviour and more generally with every­thing economists have developed on the subject of “public economics”. This deals with the economic help and stimuli the basic aspect of which – in the world of insurance – concerns the “moral hazard” or subjective risk of which we have already spoken. The key question is always “How to motivate men and women with economic measures so that their behaviour will allow a better development?” The insurance world is a mine of experience and information on all of this.

* See “Health and Ageing”, www.genevaassociation.org


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