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The Actuary The magazine of the Institute & Faculty of Actuaries

Public policy for actuaries

Actuaries will generally be aware of international organisations such as the International Monetary Fund (IMF), the World Bank, the United Nations, and the Organisation for Economic Co-operation and Development (OECD). However, they may be less aware of the extent to which these organisations publish material on matters dear to our hearts, particularly in the fields of insurance and pensions. This article is a brief review of some of the activity which is carried out by the OECD and the World Bank.
The OECD has been producing a series of texts under the rubric ‘Policy Issues In Insurance’. Volumes 1 and 2 now seem to have disappeared off the radar, but as they were produced in the late 1990s, they may have been incorporated into the ‘Insurance and Private Pensions Compendium for Emerging Economies’ when it was collated in 2002 (see below). Volume 3 of the series, ‘Insurance Regulation and Supervision’, was published in 2001 and consists of five separate papers. Those on market liberalisation issues and financial service integration/convergence may be of most interest to actuaries.

Insurance company solvency
Volume 4, ‘Assessing the Solvency of Insurance Companies’, published early in 2003, is a useful analysis from a European perspective of trends in the assessment of solvency of insurance companies within the OECD countries. Its author, Jean-Louis Bellando, former head of the French Insurance Supervisory Authority (Commission de Contrôle des Assurances), obviously has a wealth of experience to draw upon, and the paper sets out well the thinking behind current regulatory approaches. Not many would seem likely to disagree too much with his closing comments:
‘The combination of keen competition on insurance rates and mounting pressures to give investors greater returns constitutes a threat to a company’s fundamentals and financial health, contradicting the safety imperatives needed to protect policyholders and maintain a good reputation in financial markets.
These strains on insurance companies must not prompt supervisors to reduce their requirements quite the reverse.’
Be warned though that M Bellando has been known to be rather dismissive of the UK appointed actuary approach. At an International Association of Insurance Supervisors conference, following on from an enthusiastic exposition of the merits of the approach by Chris Daykin, M Bellando observed that while Claude Bébéar, the Axa CEO, had done actuarial studies with him at university, and they had played on the same rugby team, there was no way he would take the word of any of Claude’s actuaries!

Environmental risks
The next two volumes in the ‘Policy Issues in Insurance’ series, also appearing first in 2003, both have as their subject the troubled issue of insurability in relation to liabilities arising from environmental risk and natural disasters. Number 5, ‘Insurance and Expanding Systemic Risks’, is written by two academics, Professors Michael Faure and Ton Hartlieff from Maastricht University. Number 6, ‘A Comparative Analysis of the Role of Insurance in the Management of Environment-Related Risks’, is from another academic, Professor Alberto Monti from Bocconi University.
The English in these volumes is not always completely lucid, and from time to time the reader will need to find a word themselves, or disentangle some syntax, to make sense of what is being said. The Dutch paper is the bigger offender in this regard, and on a measure of readability especially devised for this review, has the highest footnote density it averages 3.2 per page, and gets up to an average of 5.8 in one 41-page chapter, along with a 20-page bibliography. The shorter Italian paper still has a footnote density of a healthy 2.6 per page, but is clearly designed to be more of a primer, and restrains itself to three pages of bibliography surprisingly, without a lot of overlap.
Comments about language aside and I only wish I could write in a foreign language even a quarter as well as these gentlemen do the material is very topical and is quite enlightening as to how the changes in the legal and public policy arena impinge on the role of insurance. Effectively, if you want a ‘polluter pays’ system, you have to clarify fairly precisely what it is a polluter is actually up to if you want it to be insurable. Related to this is the wonderfully termed ‘judgement-proof’ problem: that is, a polluter can certainly be made liable for large sums of money, but if it can’t pay, then nothing has been achieved.
Perhaps the most interesting thread is the emphasis on a much higher use of risk assessment and mitigation measures in premium-setting for a particular operation. Actuaries don’t get mentioned specifically, but clearly their role is capable of being expanded. Because of the greater involvement of specialist insurers in operation by operation assessment, insurers may become surrogate regulators.
If you have an interest in the topic, start with Signor Monti, but the Dutch paper does give more detail and teases out the issues more.
Insurance and private pensions
Also published by the OECD is a series of papers forming the ‘Insurance and Private Pensions Compendium for Emerging Economies’. This consists of 50 documents organised into two books, one for insurance and one for pensions. The introduction observes:
‘ [The compendium” offers background information and analysis for policy dialogue, training courses and seminars organised by insurance and private pensions supervisors and regulators in non-member economies. It seeks to facilitate an exchange of experience on market developments and promote “best practices” in the regulation and supervision of insurance and private pensions activities, which are essential for the sustainable development of our economies.’
For the benefit of the self-esteem of those working in insurance and pensions, it also goes on to say:
‘The importance of the economic and social role played by private insurance and pensions in domestic economies cannot be denied, especially since insurance companies and pension funds will be increasingly called upon to complement public systems in their social role as providers of retirement and health benefits. Furthermore, insurance companies and pension funds play a pivotal role in financial markets and the economy in general. They are the largest institutional investors in the OECD area and, therefore, have a decisive impact on the development of the economic infrastructure as well as the financial stability of countries. Environmental and technology risks will also generate additional need for insurance.’

If the OECD says it, it must be true
Quite a variety of material can be found on the OECD website (www.oecd.org), by entering (for example) ‘Insurance policy issues’ into the search engine. A word of warning: their listings seem a little incomplete, and the order is not immediately intuitive. Make use of a librarian with access to their databases if you know exactly what you’re looking for.

World Bank publications
Turning from the OECD to the World Bank, anyone with an interest in social security reform might like to take a look at ‘Pension Reform in Europe: Process and Progress’, which came out in May 2003. I have only looked at the summary available from the website (www.worldbank.org) but can confirm that there will be the usual economist-speak to cope with. Did you know that an important issue is whether countries are going in for parametric or paradigmatic reforms? (Not that actuaries are entirely jargon-free either, but still.) Possibly the most useful benefit to the pensions practitioner from reading these papers is in getting an understanding of the policymaker’s mindset.
Another publication noted is ‘Managing Catastrophic Disaster Risks using Alternative Risk Financing and Pooled Insurance Structures’, published in 2001. After the OECD papers on the same subject, I felt no need to try and find a copy, but it is indicative of the importance being given to this topic.
Rather more accessible are various working papers produced by the World Bank from time to time, including those on insurance and pension matters. These are sometimes country-specific, but there are some more general papers. For example, January 2004 saw a review by actuary Craig Thorburn of insurance solvency approaches called ‘On the Measure of the Solvency of Insurance Companies’ and earlier, in March 2002, Thorsten Beck and Ian Webb analysed insurance consumption in ‘Determinants of Life Insurance Consumption Across Countries’. On the pensions front, in November 2000, Dmitri Vittas and Estelle James produced an annuity pricing survey posing the question ‘Annuity markets in comparative perspective: do consumers get their money’s-worth?’ and gave a rather guarded ‘maybe’ as their conclusion.
Even when it’s not about insurance or pensions, ‘actuarial’ approaches can still pop up in unlikely places. A World Bank report paper (number 27144) drawing on Armenian experience, ‘Quasi-Fiscal Activities, Hidden Government Subsidies, and Fiscal Adjustment in Armenia’ by Lev Freinkman, Gohar Gyuluyan and Artak Kyurumyan, discusses conventional indicators of fiscal deficit, noting that these represent flow (ie revenue) concepts, and have some shortfalls. They propose using instead something they call the ‘actuarial budget deficit’, defined through stock (ie balance sheet) variables, namely the change in the total stock of government liabilities (this last being the entire stock of public debt and the money base). It’s not altogether clear why this approach is actuarial though.
Hopefully, this quick overview opens up a further source of resource material for actuaries whose work impinges on public policy areas. Perhaps more relevantly, it indicates that there is a full-scale discussion going on out there about the role of insurance and pensions provision to which actuaries could perhaps usefully increase their input.