Chapter 7: The Geneva Association (1973 – 2001)

10. The Success of Insurance
“They told me that having attended a Polytechnic the last thing I should get into was insurance. They should hear you”. It was Claude Bébéar who expressed himself thus as he offered me coffee in a bar on Rue de Londres in Paris, in the spring of 1974. He had just joined the Geneva Association. I had told him my story because I thought the role of insurance was destined to become increasingly important for the whole of economics. He had begun his career in a small mutual society in Rouen whose head office I had visited near a castle. Shortly afterwards, it took the first steps towards its first merger with “Mutuelles Unies”. Some years later it was the turn of the Drouot group. Later still, the Paris group with “Paternelle” and then “Equitable Life” in New York, and later still UAP, the leading French insurance company, without counting those in Australia, England, the United States and elsewhere. Someone said of him that he was the French and European Napoleon of insurance, with a difference: he had not experienced Waterloo. This is the best demonstration of the fact that insurance could boast its economic success stories like those one reads in books about the epic deeds in coal and steel, railways, chemistry and banks.
Yet, articles written by American and European experts in management continue to explain that most business mergers end in failure. They do not observe what has been happening in world insurance for at least thirty years. They are not used to looking at that area. Claude Bébéar and others – in the Netherlands, in Germany and to an extent in England and Italy – must appear as extraterrestrials to them. They are sustained on the one hand by the position which modern economics opens slightly to insurance, and on the other by the entry of senior managers with increasingly wider vision. Claude Bébéar also sought to oppose the drift that ended in giving rise to the recent large scale financial crises, with a book titled “Ils vont tuer le capiralisme”.* To my great satisfaction in the book’s dedication he recalled our 1974 discussions “in memory of an old complicity”.
When “financial services” are mentioned it is still the bank that is understood first, start­ing from the idea that in any case banks and insurance would become increasingly alike. It is a superficial view. Today insurance has a big advantage: its business is basically linked to specific and solid characteristics. It is about covering risks through mutuality, the creation of long and very long term reserves, it is a bond with results linked – at least in part – to real costs. Meanwhile the bank’s daily functions are faced with all sorts of possible alternative competition: industrial companies themselves act as banks with commercial cards, pension funds, sales financing. For their part the big stores distribute their credit cards, and post offices in some countries offer themselves as replacements for local banks, and so on. Fortunately banks are supported by a long tradition and by a managerial class that often knows well how to fight. But equally often, and increasingly so, they try to create their turn­over as intermediaries leaving as much of the risk as possible in the hands of their customers.

11. Banks and Insurance
For over twenty years now it’s been fashionable to talk of “bankinsurance” or “insurfinance”. There is some truth in these appellations, but also some confusion. First of all it is clear to every entrepreneur that the possibility of strengthening his sales network and distribution is a fundamental concern. Insurance companies, therefore, try to test and to organise distribution with every possible method. New technologies offer opportunities. Sometimes there is even an interest in having various networks within the same group compete with each other to stimulate or to arouse them. In many cases and in many countries banks have become very important insurance distribution networks. Whether they operate in insurance for themselves or for an insurance company they are still dealing in insurance. Yet, some bank savings products are often called insurance when in fact they are nothing but cash bonds with other names. In any case, the question of distribution can only be resolved through practical business in line with the market, followed with maximum pragmatism. Case by case, situation by situation, the best solution is sought.
At a more strategic level there is the question of the construction of large groups where, following a variety of formulae, banks and insurance companies come together, such as ING in the Netherlands or other very important companies, in Germany for example, that work together with the large banks. In this case it shouldn’t be thought that the bank and the insurance company are totally integrated within the overall group.
It would be like imagining that producing pneumatic tyres for cars and pneumatic systems for engines are the same thing, makeable on the same production line. Each to his own special­ty and trade. Making a fruit salad does not imply that bananas and pears are the product of the same tree. It is better if bananas and pears are produced in the best way.
Thus bank and insurance products must maintain their own processes and identity, while allowing for specific situations in which they border on each other. But, at the end of the day we need cash, a policy against accidents, life insurance or membership in a pension fund, a mortgage, an investment and so on. Often these financial products are complementary but insurance is insurance and a bank product is a bank product.
The big bank-insurance groups in particular can offer the advantage of forming a large defensive block to better guarantee their independence. But it is not always the case.
Over the last quarter of a century, however, a large change can be observed in the relations between banks and insurance companies, particularly in some European countries. In economic thinking, insurance companies become increasingly important: at one time one could think that banks constituted the centre of the financial world and that insurance was on the periphery. Today one can consider that insurance companies are increasingly the kernel at the heart of the financial system, as tangible signs in at least three or four European countries suggest.
This specific potential growth is revealed in another way. For a long time banks have enjoyed the services of the Central Bank as “lender of last resort”. For insurance companies, the insurer or the reinsurer of last resort is not the Central Bank at all, but the State itself and the other public institutions. This is an enormous difference.
When in the financial system one speaks about systemic risk it means the danger of a rush to the bank counters that end up being unable to satisfy the cash requests. It is financial panic.
There is none of this in insurance, they tell us, one can only turn to this when an accident happens and so there is no rush to the counters. Panic occurrences are much smaller.
However rightly, insurance is different because it can become insolvent in another way. The example of September 11 is there to remind us of this. Tens and tens of billions of dollars had to be paid, perhaps a third of all the world reserves held by insurance companies in the sector. For this time they should be enough, but what about later?
The reserves built up against long term risks might also make economists rethink the reasoning behind the strict tax system’s adherence to annual periods. Insurance companies sometimes obtain dispensations on taxes relating to the risks of long term catastrophes (they are called stabilisation reserves). Why “dispensations”? It is the very principle of tax regimes set up at the time of the agricultural economy – with an annual rhythm – that should be rethought in a service economy in which the economic value of the result is distributed over variables, and sometimes over a long period of time.
Finally as far as the question of business integration is concerned the attention of the economists should again be drawn to three important points.
Insurance (private) is a strange institution that cannot exist in a centralised economy regime (such as in popular socialism): in that situation it is totally absorbed into the tax system (if there is one). Under Stalin cars could be built in one or two factories, but there could be absolutely no private insurance companies. On the other hand insurance is an expression of economic solidarity between individuals or institutions subject to the same type of risk. In other words, insurance is a good indicator of the level of freedom and possible economic solidarity (on the other hand even right wing dictatorships sometimes tend to nationalise insurance).

12. The Benefits of Competition
Notwithstanding the tendency towards integration, insurance cannot and must not reach an integration of the industrial type. There is no place for a company like IBM, or of the builders of aircraft or even cars. This is for various reasons, apart from those linked to the diversity of local markets. It is preferable for the sector as a whole that the cover against risks should not concern every company in the same way, with the risk of sinking the whole profession. The multiplicity of insurance companies is a guarantee of flexibility in the sector. Research into the rationality of management through mergers reveals much greater limits in the insurance sector than in the traditional industrial sector.
If there is competition between insurance companies the distribution of risks within the world insurance system is a key consideration. This can be checked horizontally, with companies of the same level, or vertically through reinsurance. Let us consider the following point: it is better to cover 10 different small risks than one big risk whose cost is equal to the total of all ten. Or the big one is distributed among various reinsurance companies. It is a kind of oligopoly that generally is not studied in economics and that has the effect of improving insurance provision, of making it more flexible, versatile, at worst less expensive and in any event more efficacious. Here we have another economic topic through which insurance pushes innovation.

* “They Are Going to Kill Capitalism” (“Ils vont tuer le capitalisme”), Plon, Paris,2003, with Philippe Manière.

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