Finance and The Good Society by Robert J Shiller
Publisher: Princeton University Press
Last spring I heard Robert J Shiller speak during his London book tour for Finance and The Good Society. It was a watershed experience for me as it addressed a question weighing heavily on my mind - whether finance could be an instrumental part of the efficient and just allocation of capital for the benefit of society. Shiller proposed financial innovation as a necessity to achieve this goal and backed up his assertion with a range of detailed, pragmatic ideas for implementation.
This book will appeal to a much wider audience than that might suggest, however, with the easy flow, readability and wisdom that come hand-in-hand with being a bestselling author and professor of economics at Yale. Shiller demonstrated the same eloquence and clarity when he forewarned the public about the 2000 stock market and the 2008 sub-prime bubbles.
At first, actuaries might be comforted not to have been mentioned specifically in the book as, although Shiller offers a balanced view of the parts played by the various actors in the financial crisis, there's also a fair amount of constructive criticism. However, I did recall Oscar Wilde's quip that "there is only one thing in the world worse than being talked about, and that is not being talked about" when noting a chapter allocated to each of the 'other' finance professions.
Pensions and insurance are provided as historic examples of finance contributing to the good of society, and insurance features heavily in the financial innovation that Shiller hopes will develop. A few examples of this are outlined below.
l Investment consulting actuaries might be interested in the concept of bonds issued by sovereigns with GDP-linked coupons and principal repayments. This could appeal from an inflation-tracking perspective as well as being a means of investment diversification. The selection of GDP as the linked-metric might need further consideration though. A number of incongruencies between the current definition and measurement of GDP with desirable outcomes have been identified. To align long-term savers' interests with the metric as it stands could create conflicts of interest. (For further discussion on GDP, see Soapbox).
> Life and non-life insurance actuaries might be interested in the concept of long-term catastrophe insurance. Indeed, the potential advantage of 'switching' between longer- and shorter-term insurance products was mentioned by former Swiss Re CEO John Coomber in the November edition of The Actuary.
> Micro-insurance and public policy actuaries will likely already be aware of the enormously positive role that weather insurance against crop failure can play.
> Non-life actuaries, parents and perhaps all of us might be interested to read of livelihood insurance - a long-term policy that individuals could purchase on a career, education or a particular investment in human capital. This would pay out if demand for the skill or income from it diverged from expectations.
> Non-life insurance and finance actuaries' skills might find an application with home equity insurance, which could compensate for a drop in market value of homes.
For me, however, the description of 'the good society' in relation to the BP spill seemed incomplete. It painted a picture of an egalitarian society in which all people respect and appreciate each other, while the description of the BP spill touched upon the financial losses incurred by portfolio managers, those in the tourist industry and potential losses to wider society owing to earlier depletion of oil stocks. But lack of acknowledgement of the value and fundamental role of ecosystems and biodiversity as providers of goods and services to global as well as future societies seems an omission. In the section on the BP spill, insurance was equated to risk management. While insurance can pass financial effects and certainty from one party to another, financial compensation is rarely restoration and doesn't necessarily compensate all affected parties.
Perhaps lessons from the financial crisis such as the importance of fiduciary duty and connection should be taken heed of in these types of insurance contracts and engineering projects.
This review has focused on insurance, but if you are interested in understanding roles and responsibilities in the financial system - regardless of whether historical, philosophical, psychological, physiological, political or economic explanations and analogies resonate - Finance and The Good Society is likely not to disappoint.
Tracey Zalk is a finance actuary and a member of the managing committee of the Institute and Faculty of Actuaries' Resource and Environment Group