THE RISK INSTITUTE – ISTITUTO DEL RISCHIO – L’INSTITUT DU RISQUE
On the basis of a voluntary network, partly supported by The Geneva Association, The Risk Institute was established in order to extend the studies on the issues of risk, vulnerability and uncertainties to the broader cultural, economic, social and political levels of modern society.
The strarting point defining the programme of action was an informal meeting held in Paris in 1986. Among the participants were Raymond Barre, Fabio Padoa, Richard Piani, Edward Ploman, Alvin and Heidi Toffler and Orio Giarini.
A first report, by Orio Giarini and Walter Stahel, was published in 1989, reprinted in 1991 and revised in 1993, with the title The limits to Certainty — managing risks in the modern Service Economy (Kluwer Academic Publishers, Dordrecht, the Netherlands), with an introduction by Nobel Laureate Ilya Prigogine. It was also published in French, Italian, Romanian and Japanese. A fully new German version was published in 2000 with the title Die Performance Gesellschaft (Metropolis-Verlag, Marburg).
The book stresses the point that uncertainty is not just simply the result of inadequate or insufficient information. Every action extending into the future is by definition uncertain to various degrees. Every ‘perfect system’ (or ideology) is a utopia, often a dangerous one: the total elimination of uncertainty in human societies implies the elimination of freedom. Learning and life are about the ability and capacity to cope, manage, face, contain and take advantage of risk and uncertainty.
In 2002, The Risk Institute published with Economica (Paris) the book Itinéraire vers la retraite à 80 ans. Ever since the The Risk Institute has been mainly concerned with a research programme on social and economic issues deriving from extending human life expectancy (usually and wrongly defined as the ‘ageing’ society), which is considered the most relevant social phenomenon of our times. This is particularly relevant in the context of the new service economy. The Risk Institute has contributed to the organisation of the conference on “Health, Ageing and Work” held in Trieste and Duino on 21-23 October 2004. On this basis, it has taken the initiative to publish these EUROPEAN PAPERS ON THE THE NEW WELFARE — the Counter-ageing Society, in two versions (one in English and one in Italian), with the support of various institutions.
Service Economics and Risk Management in a nutshell
• Economics is a social ‘science’ originating as a consequence of the industrial revolution, and developing for about two centuries. It is NOT the ‘science’ of economy per se, but of a specific phenomenon starting in the eighteenth century. It concentrates on the manufacturing of goods, and — culturally or philosophically — is linked to a deterministic thinking (rather valid, because useful, until the beginning of last century). From all this derives the definitions of a series of fundamental concepts: value, equilibrium, productivity, the role of prices (explicit and implicit ones) etc.
• Within this framework the role and place of an important economic sector such as insurance remains secondary (rightly so at the time of Adam Smith). Uncertainty is linked to incomplete information. The basic paradigm is the reference to equilibrium, which implies complete information, even if in our era this is still admittedly imperfect. In this perspective, science is implicitly considered as a means to reduce the information gap and finally to eliminate it. And insurance with it. So, why bother to integrate insurance (and risk management) in the basic studying and learning of economics? The very idea of imperfection is wrong as it is based on a kind of ideological determinism.
• The point is that information is by nature ‘imperfect’, because the value (economic value) is not the result of a static equilibrium, but of a dynamic disequilibrium. Even when economists like Samuelson admit dynamic analysis, the phenomena analysed are presented as series of sequentially static states.
• To really understand this, one has to go back to the process of producing wealth: the first step is to recognise that services today are production functions for over 80% of all resources used. Services are NOT a sector, but production tools in all economic activities. The most advanced ‘manufacturing-industrial’ companies are those where service functions are dominant: research, development, quality control in ‘production’, information, storage, distribution, utilisation, etc. and finally waste management (the ecological issues are totally integrated in the modern economic cycle in this way).
• The second step is to realise that the value of a service-based economy is not dependent on the existence of a ‘product’ (even if this is a service), but in its performance in time: this is the source of two basic forms of uncertainties. The first refers to the duration of performance in (future) time. The second to the events which might alter the mode and quality of this performance (and here we rediscover the notion of Risk Management).
All this leads to the idea that the pricing system of insurance is NOT just an odd case with reference to the rest of the economy (the famous question of the reversal of the costs and prices cycle): in the service economy, the pricing system of insurance based on uncertainty is now at the core of the whole economy. Whenever a ‘product’ is sold today, its future performance will add to the present price paid future foreseen and unforeseeable costs. In most cases, higher than the cost of the initial ‘product’. Some ‘products’ then, as in the case of waste management and environmental costs, become a sort of negative public goods often paid by taxes (determined ex post). The liability explosion is strictly interconnected with this issue.
It seems a paradox, but insurance (and risk management) is simply at the core of the modern, service-based economy. Just the opposite of the normal, current perception and understanding. For the moment, insurance will not make considerable progress as long as the basics of economics are still the ones deriving from the traditional (no longer existing in fact) industrial-manufacturing era. Obviously there is no question of services totally replacing manufacturing. They are both needed: there is no service without a tool and vice-versa. The question is just a reversal in the priorities (from hard products to services). And this alters the notion of value, from the one fixed in an equilibrium system between supply and demand at a given moment in time, to the one in which any price given at any moment in time is just a contract or commitment such as an insurance policy: most of the costs in the ‘utilisation’ process — or performance — (determining the real value of any economic system) intervene ‘later’ in time, and are inevitably just ‘probable’.
Linked to this process (and to the impact of technology) is an understanding of the notion of vulnerability as a basic reference to risk management. For more details on this issue, see the study on “The limits to Certainty — Managing Risk in the Service Economy” published under the auspices of The Risk Institute and The Club of Rome.
Director: Orio Giarini
Via della Torretta, 10
I – 34121 Trieste
Cell phone +393338684598
Route de Malagnou, 53
CH – 1208 Geneva
Tel. +41(0)227076600 – Fax +41(0)227367536
Cell phone +41793537910
Macros Research was founded in 1987 in Milan and conducts surveys and research on behalf of the financial sector, insurance companies and banks.
It belongs to the Macros Group, which also includes two other companies: Macros Consulting, operating in the field of top management strategic consulting, and Macros Risk Management, a consulting company dealing with integrated risk management.
Macros Research carries out research projects and studies according to a multidisciplinary approach to analyse and investigate – both under an economic and financial perspective — the management of economic and social risks in the public and private sectors.
The goal of Macros Research is promoting and carrying out theoretical and empirical research in the area of insurance economics with reference to the extension of the life cycle and its impact on the welfare, social security and health care systems. Among the various research projects conducted by Macros Research, the following are particularly meaningful:
• Pension and Welfare systems in Italy and the OECD countries
• Private savings and the public pension systems
• Ageing society and the labour market
• Long term care
• Insurance Economics
• Risk Management
Macros Research published several books and articles and, in collaboration with the Risk Institute, is the editor of the European Papers on the New Welfare – the counter-ageing society. Since its inception, Macros Research has stood out thanks to its international vision confirmed by over 20 years of collaboration with the Geneva Association, the Risk Institute of Geneva-Milan-Trieste, national and international universities and research institutes. The organization of international conferences and seminars in collaboration with experts from all over the world is another indicator of the international commitment of Macros Research.