Bernard Spitz
FFSA Chairman
Excerpted from the 20th anniversary issue of Risques
Président de la FFSA
Risques: Bernard Spitz, as we look back with this 20th anniversary issue of Risques, what role do you envision for insurance tomorrow?
Bernard Spitz: First, allow me to wish Risques, its editorial board led by Jean-Hervé Lorenzi, its staff, and all its contributors over the past 80 issues and 20 years, a very happy anniversary. I'd like to start by saying a well-deserved “mission accomplished” to everyone. When, hoping to develop French thinking on risk, and to create a proper forum for debate and exchange, FFSA and Denis Kessler decided to create this journal, they tapped into a rich pool of unique experience and knowledge, ultimately facilitating the development of truly original insurance-related thought for the new millennium. Risques is coming of age in this very first decade of the 21st century, at a time when it is already becoming apparent that it will be the Century of Insurance. (I'll get back to this in more detail.) We have helped shape modern thinking in our field. I have no doubt that over the next 20 years the new insurance concepts and solutions demanded ever more stridently by our society shall first be sketched out in the pages of Risques.
Risques: What do you mean by “the Century of Insurance”?
Bernard Spitz: We already live in an Insured Society, where all kinds of insurance institutions lend form to the social contract. But I think we can go even further and predict that in the 21st century, competitiveness between countries and social cohesion will be closely related to insurance. The 20th century saw a trend towards the generalization of insurance in industrialized and developed societies. The 21st century is going to see a similar trend in emerging countries, towards a similar goal of Insured Societies. These emerging countries are home to billions of individuals who, as they become more affluent, and acquire assets, and seek access to health-related services, are going to want insurance, even though it will be a while before they have a social safety net in place like we do.
Another way to show the importance of insurance in France would be to look at the key role it plays in financing the French economy. Over half of the insurance industry's 1.6 trillion euros in assets are invested in companies. The insurance industry is a factor in economic stability, and if we allow it to do so, it could serve as a pillar as the economy emerges from the current crisis.
Risques: What does that mean in terms of behavior when faced with risk?
Bernard Spitz: The more developed a society becomes, the more its relationship to risk changes. Contemporary French society is characterized by a growing aversion to, and an increasing fundamental intolerance of risks, which seem to be growing in number and complexity. At the same time, there are growing fears that the protective systems we have in place are gradually eroding. In the face of natural disasters and unforeseeable incidents which would have been considered by many a hundred years ago as acts of God, society is becoming apprehensive, sometimes excessively, sometimes rightly so. We feel vulnerable. We no longer accept risk taking or, on the other side of the same coin, we will only take a risk if that risk is covered in every way possible.
But risk acceptance is part of our everyday lives, speaking both personally and professionally. We can't barricade ourselves behind a new standard of zero risk, in which the precaution principle is the ultimate decider. Risk that is well managed, both individually and collectively, opens the road to progress. Conversely, risk that is denied or not taken leads to economic asphyxiation, the shirking of our civic responsibility and to regression; for example, essential research in the field of healthcare is currently being blocked. This can only constitute fertile soil for populism to take root.
The modern need for increased protection goes hand in hand with an improved knowledge of the nature of risk, at a time when information is distributed ever more quickly through modern technologies. All of this leads to a dual need for protection: a demand for prudent and cautious behavior that could stifle innovation, on one hand and, on the other, a demand for someone to assume financial responsibility at precisely the time when there is no longer enough public money to do so. This discrepancy is contributing to an increasingly widespread feeling of frustration and anxiety that the government is no longer in a position to respond to alone. Not in France, or anywhere else for that matter. Our society is looking for reassurance of two kinds: people want to be reassured with regard to the future and with regard to innovation, and they also want to be protected from all of the risks they may be exposed to.
Risques: Isn't globalization also viewed as a factor that aggravates risk?
Bernard Spitz: Globalization has done more than fill our shops with cheap consumer goods: it has put us in direct contact with – and thus in competition with – advanced and dynamic societies, for example in Asia, whose ideas of acceptable risk differ from our own. Innovation and technical progress have come so far as to create a robust and enterprising middle class in a matter of years. The relationship people have to risk, their perception of risk, is an essential factor in their competitiveness. You may have noticed that contract to operate the Stockholm subway was awarded to a Hong Kong company. South Korean consortium beat out EDF, GDF, and Areva to win a contract to build four nuclear reactors in the United Arab Emirates. All of this cannot be explained away by unfair competition, protectionism and downward competition. Countries like South Korea have made extraordinary efforts in terms of education, training and progress, and have a state of mind – a mindset which embraces the upwards curve – comparable to what we knew during the thirty years of the postwar economic boom.
Advocating regression or taking a fatalistic view of decline is obviously not an option. Quite the contrary. A new culture of risk management must emerge, making it possible to better manage risk in order to create a dynamic that facilitates growth and progress. The fundamental question in the public debate is therefore as follows: “What is the acceptable degree of protection from risk, on a case by case basis and in every field? How can such protection be successfully implemented – and who will pay for it?” The tools available in 1945 no longer suffice in today's France; and since the government's resources are not limitless, it will call for companies, individuals and the insurance industry to take part in the necessary social and civic debate, and in the solutions resulting from such a debate. This shall be the core of the political debate over the coming years.
Risques: How will the scope of this debate be defined?
Bernard Spitz: That is precisely the problem: the scope is very broad! It will be necessary to assess, limit and analyze needs and the cost of all the issues affecting our society, from dependency to medical liability, and from industrial risks to environmental risks... We see new examples of this all the time in the news, like the drama with Hurricane Xynthia. Before that, it was H1N1.
Nowadays, what makes a society modern, what enables it to reach a social consensus, what makes it dynamic in terms of production, exchange, creation and entrepreneurship will be based on the amount of confidence that can be generated within that society. And such confidence will be closely linked to the society's response to the issue of risk.
Societies that best manage risk collectively will have the greatest competitive advantage tomorrow. Risk management is key to the success and the cohesion of modern societies. This is why the role of the insurance industry – who specializes in risk management – is bound to undergo major growth in all sectors of society.
Risques: Does this mainly affect the government or does this issue also concern businesses?
Bernard Spitz: Insurance management has become an increasingly important strategic element of any business. As an example, let's take the 1980's phenomenon in which a company's legal skills took on increasing importance, to the point where the legal department's quality became an asset in the context of its commercial and competitive management. Over the following decade, financial issues rose in prominence to where mastery of financial instruments enabled companies to out-position global competitors and generate significant financial revenues. The problem was all of the excesses that occurred when certain masters of these techniques happened to forget their core roles, resulting in many of the scandals that undermined the legitimacy of the business world, before setting off the recent international financial crisis in the United States.
As far as the coming years are concerned, expanding the Insured Society is a safe bet. The financial crisis has highlighted the need for transparency with regard to risk. People are realizing that the value of an asset depends on the risks associated with it. Companies are being called upon by their investors to disclose the risks that have been taken and to explain how such risks have been hedged. The fact is that optimized insurance management is going to become a strategic issue for companies.
“How do I insure myself effectively?”, “How do I manage my risk?” are going to become strategic questions for company directors, who are going to be subject to close scrutiny from financial analysts. As a corollary, we are going to see Chief Risk Officers (CROs) play a more important role within companies – just as we have seen the role of CEOs and CFOs etc. increase in importance over the past decades. Extremely detailed and formalized processes will be set up for risk forecasting and assessment – industrial, social, environmental, terrorism-related risks – in order to take out the most favorable insurance policies possible. This will be the case in all industrial sectors as well as in all service sectors.
Risques: So this is going to be a “comeback of insurance” of sorts?
Bernard Spitz: More like a revision of the role to be played by insurance in the modern economic and social context. The age of Jolyon Wagg, the insurance salesman from the Tintin comics, is long gone. Individuals will also be affected by changes to issues of importance to governments and companies. Protecting their assets, families and property will remain a major concern, but new risks are also going to result in new needs: a good example of this is the consequence of our aging population and the looming “Senior Boom,” with an increased of risk of dependency. This is a key issue for French society that will require insurers to respond as innovatively and uniformly as possible, so that the risk can be pooled and spread out over several generations. We must keep in mind that we will have to start as soon as possible in developing a very broad offering, so as to deal with this problem as best we can.
Risques: What can be said about the role of the insurance industry in the new financial system that is trying to emerge as a result of the financial crisis?
Bernard Spitz: The insurance industry has had to contend with an international crisis that it did not create. In France, it did not cost the taxpayer a single euro. On the contrary, the good health of the insurance companies has helped to reduce the impact on individuals and on the country's economic fabric. Insurance industry regulations functioned properly. The corporate governance of the insurance companies has not been called into question. This is why the image of insurance companies has emerged untarnished in recent months.
However, in terms of governments and the public authorities, there is still a tendency to view the insurance industry as part of the financial services sector as a whole, and to apply to it rules that don't take its individual characteristics into consideration. So the international financial system will need to strike a new balance in the future, in terms of both its delineation and rules, between the insurance industry and its other components.
The focus given to banking has often led to less attention being paid to the insurance sector, and so the fundamental, profound difference between these two sectors is forgotten: as far as banking is concerned, the entire question of regulation is articulated in terms of liquidity; as far as insurance is concerned, the question of regulation is articulated in terms of solvency. A non-liquid insurer will generally have been insolvent for a long time, whereas a non-liquid bank is not necessarily insolvent. In a bank, the important thing is therefore control over liquidity, whereas for the insurance company the important thing is control over solvency. This difference was clearly confirmed by the financial crisis. This is why, when priority is given to the banking sector, it is difficult to come up with satisfactory solutions for the necessary reform of global capitalism, in spite of the very serious financial malfunctions that we have seen over the past two years. It is high time to distinguish between two approaches that are in effect complementary to each other.
Risques: Does the insurance industry have any specific values that it can contribute to this reform?
Bernard Spitz: Of course, and this is the case with all of the segments of the insurance industry: the mutual insurance sector, insurance companies, and so on. The sector as a whole is working with a long-term perspective. Insurance companies are investing, financing and insuring for the long haul. Their assets, valued at some 1.6 trillion euros, are currently invested on a long-term basis in the French economy, in Government bonds and in companies, precisely at the time when companies have so little access to other sources of liquidity. We should add that insurance companies – which invest on an enormous scale in the domestic economy – did not use their insurance transactions to engage in any of the excesses that permanently undermined the trust placed by citizens in their financial institutions, threatening social cohesion.
Risques: And yet this fundamental difference has not been sufficiently taken into consideration...
Bernard Spitz: Giving full consideration to all of the specific characteristics of the insurance industry in the context of the international regulatory system is necessary and important – and this remains our urgent priority. This is very apparent in the context of the current negotiations with the European Commission on the Solvency II Directive, the regulatory framework applicable to the solvency of insurance companies, negotiations in which the regulators are recommending rules synonymous with paralysis, decline and unemployment. And not only French insurance companies are claiming this, but rather all European insurance companies. From the macroeconomic perspective, it would be totally inefficient to require insurance companies to hold too much equity as one would therefore be making the economic environment fragile, which would have negative repercussions on insurance itself. Excessive prudence exacts an excessive cost, and we have to do everything to avoid inflicting such a cost on our economies.
This is also apparent in the issue of the accounting standards reform, which has been unwisely left for many years to a self-proclaimed external body, the IAS Board. A company's accounts must faithfully reflect its financial position, and they cannot dictate the way the company has to function. This commonsense reality is currently being threatened by a set of reforms that may be based on good intentions but which are dangerous; not only for insurance companies, but for the economy as a whole. What is being proposed is likely to penalize Europeans and benefit the Anglo-Saxon model alone. Should the Anglo-Saxon world alone benefit from the recent excesses being dealt with by the international community, when they were the first to ignore the standards they encourage others to follow? It would be totally unfair!
Risques: What should the younger generations think of the insurance industry?
Bernard Spitz: First of all, that the insurance industry will enable them to maintain an inter-generational fairness without which they would have to pay for their elders' lack of prudence. Secondly, that the insurance industry can also offer them employment opportunities – 14,000 persons were hired in the insurance industry in 2009 – and that insurance constitutes an essential element in their lives as citizens.
We all know that the main issues to be dealt with in the world of tomorrow will include education, training and research. This is true in all areas. This also must be the case with the insurance industry and risk management. The sector must be better explained in order to be better understood by society.
For decades, the work done by economists and researchers in the areas of finance and banking has helped to shape the economic thinking of our time. Today it is important to foster a comparable insurancerelated spirit.
The creation by the French Federation of Insurance Companies of the CORA, the Conseil d'Orientation et de Réflexion de l'Assurance, which operates as a scientific and advisory board to constitute a kind of think tank, is a first part of the response. But, more broadly, it will be necessary to concentrate efforts on educating the young. At the academic level, there are some remarkable teams in France, like the researchers at the Toulouse School of Economics. As far as professional training is concerned, there are high-level qualifications and schools: the ENASS, the Master's in Insurance and Risk Management at the University of Paris-Dauphine, the Risk Foundation and so many others... In order to ensure that the French educational system fully performs its task, it is important to ensure that these schools receive the recognition and admissions that they deserve, and to encourage research.
More generally, it is necessary to integrate an understanding of insurance and risk management into all the training and education given to young people and business students, engineers, doctors, future civil servants etc. It is inconceivable that students could be able to complete their courses without having acquired a minimal understanding of how insurance works. The knowledge of both the responsible citizen and the competent professional of the 21st century depends on this.
Risques: Are you advocating a cultural revolution?
Bernard Spitz: That is the direction that history is taking. At any rate, this cultural revolution is already happening and insurance is the vector for it. Our chance to preserve our social model and the consensus binding our community of citizens will depend on an efficient and diversified insurance system. It is our ability to champion such a system in France and in Europe, intellectually and professionally, that will determine our collective ability to create an efficient society based on solidarity and productivity in the context of international competition.
Rather than giving precedence to the precaution principle, which is a defensive reflex, we should favor a proactive principle, that of optimal risk management. This will be one of the 21st century's major challenges.