The contribution of the insurance industry to economic growth in italy and europe

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The contribution of the insurance industry to economic growth in italy and europe

  1. 1. THE CONTRIBUTION OF THE INSURANCE INDUSTRYto economic growth in Italy and Europe
  2. 2. THE CONTRIBUTION OF THE INSURANCE INDUSTRYto economic growth in Italy and Europe
  3. 3. This report has been written with the help of an Advisory Board composed by:Advisory Board:Jacob A. Frenkel (Vice-President A.I.G.)Gerard de la Martinère (President, AXA and FFSA)Rainer Masera (Managing Director and President of Italian Financial Institution Group, Lehman Brothers International)The following groups took part in the research:ANIA working group:Dario FocarelliSergio DesantisCarlo SavinoPaolo ZanghieriAmbrosetti-The European House working group:Paolo BorzattaStefano BosisioAlberto CamatiniMichel GreicheMauro MaraschiStefania SantamariaJan SchuppiusLeonardo ZannierThanks to:Juan Badosa Pagés, (President, CESCE), Féliz Bonet Sánchez (Chief Investment Officer, Generali Group Spain), Piero Botto (CEO,Unicredit Assicura) representing Roberto Nicastro (CEO, Unicredit Banca), Luigi Calvi (Member of the Credit and Finance Committee,Assolombarda), Raffaele Capuano (Director General, COVIP), Valentina Carlini (Fiscal Affairs, Finance and Corporate Law Department,Confindustria) representing Francesco Bellotti (President, SME Credit Comitee, Confindustria), Sir Brian Corby (former CEO, PrudentialUK, former President CBI), Gerardo Arósegui (CEO, Aviva Grupo Corporativo) representing Guillermo de la Dehesa (President, AvivaGrupo Corporativo), Giancarlo Giannini (President and Director General, ISVAP), Pilar González de Frutos (President, UNESPA), StephenHaddrill (Director General, ABI), Thomas Hess (Chief Economist of the Unit Economic Research and Consulting, SWISS Re) representingRoger W. Ferguson (President, SWISS Re), Bertrand Labilloy (Directeur des Affaires Economiques, Financières et Internationales, FFSA),Roberto Marchan Martín (CFO, CESCE), Massimo Michaud (President and CEO, AXA Italia and Vicepresident ANIA), Monica Mondardini(CEO, Generali Group Spain), Marcella Panucci (Director Fiscal Affairs, Finance and Corporate Law Department, Confindustria)representing Francesco Bellotti (President, SME Credit Comitee, Confindustria), Stéphane Pénet (Directeur des marchés DABR, FFSA),Sandro Salvati (former CEO, Alleanza Assicurazioni and Toro Assicurazioni), Elio Schettino (Director Fiscal Affairs, Finance and CorporateLaw Department, Confindustria) representing Francesco Bellotti (President, SME Credit Comitee, Confindustria), Giuseppe Schlitzer(Director General, Head of Firms’Growth Project, Confindustria) representing Francesco Bellotti (President, SME Credit Comitee,Confindustria), Irmfried Schwimann (Head of Unit Financial Services Banking and Insurance, European Commission – Directorate GeneralCompetition), David Snyder (Vice President, AIA) representing Marc Racicot (President and CEO, AIA), Domingo Sugranyes Bickel (VicePresident, MAPFRE) representing José Manuel Martinez (President, MAPFRE S.A.), Elemer Terták (Director Financial Institutions,European Commission – Directorate General Internal Market), Karel Van Hulle (Head of Unit – Insurance and Pensions, EuropeanCommission – Directorate General Internal Market), Ignazio Visco (Vice Director General, Banca d’Italia), Steven Weisbart (InsuranceInformation Institute) representing Robert P. Hartwig (President and Chief Economist, Insurance Information Institute), Claire Wilkinson(Vice President, Global Issues, Insurance Information Institute) representing Robert P. Hartwig (President and Chief Economist, InsuranceInformation Institute).
  4. 4. Study commissioned by Associazione Nazionale fra le Imprese di Assicurazione (ANIA). The opinions expressed are the authors’ and ANIA is not responsible for them.THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  5. 5. 4 TABLE OF CONTENTS Premise: The purpose and subject of the research project ....................... 7 SECTION I THE ROLE OF THE INSURANCE SYSTEM IN VALUE CREATION IN ITALY AND EUROPE I.1 The size of the insurance sector: international comparison .............. 9 I.2 Is the underdevelopment of the insurance industry grounds for concern? 11 I.2.1 How the frame of reference is changing: The “four challenges” of our time............................................................................................ 11 I.2.2 The insurance industry and the evolution of risk.............................. 12 I.3 How the insurance industry can foster economic growth ........... 13 I.3.1 Thanks to its broad range of business services, the insurance industry can help improve business transparency and financial management..................................................................................... 15 I.3.2 Rewarding entrepreneurial aptitude, the insurance industry encourages more investment and propensity to innovate, hence a more dynamic market....................................................................... 15 I.3.3 Insurance can ease the pressure on the public system, offering supplementary social protection ...................................................... 16 I.3.4 The insurance sector can help create liquidity and mobilise savings, foster financial intermediation, raise and channel substantial financial resources and facilitate firms’ access to capital................................ 16 I.3.5 The insurance industry helps foster a sensible risk stance on the part of individuals and firms............................................................. 17 I.3.6 Insurance helps smooth consumption over people’s life cycle......... 17 SECTION II THE INSURANCE INDUSTRY AND ITS VALUE FOR GROWTH II.1 The outlook for the social security system................................... 20 II.1.1 The public pension system.............................................................. 22 II.1.2 Supplementary pension plans ......................................................... 24 II.2 Towards a new health care system ........................................... 27 II.2.1 Evolution of the National Health Service in Italy .............................. 27 II.2.2 Public and private health spending in Italy ...................................... 28 II.2.3 The outlook for health and long-term care expenditure................... 30 II.2.4 Towards a more efficient public-private equilibrium........................ 31 II.2.5 The possible role of private health insurance .................................. 32 THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  6. 6. 5 TABLE OF CONTENTSII.3 The insurance industry, small and medium-sized enterprises and the financial markets: new opportunities for value creation .................. 33 II.3.1 The evolution of the role of small and medium-sized enterprises in the Italian and European economy .................................................. 33 II.3.2 Interaction between SMEs and the insurance industry in Italy ........ 34 II.3.3 SMEs, the banking system and access to credit.............................. 37 II.3.4 Evolution of the role of the insurance industry in the financial markets ........................................................................................... 38 II.3.5 Constraints and incentives of the current prudential rules in Italy and Europe: the Solvency II project................................................. 41II.4 Natural disasters and terrorism: the key role of public-private partnership 41 II.4.1 Natural disasters and terrorist attacks............................................. 41 II.4.2 The Italian system of insuring against large-scale damage ............. 43 SECTION III PROPOSALS TO ACTUATE THE POTENTIAL OF THE INSURANCE INDUSTRYIII.1 The pension system ............................................................. 45 III.1.1 Recommendations for European policy-makers............................. 45 III.1.2 Value creation impact simulations.................................................. 47III.2 Health and long-term care ..................................................... 48 III.2.1 Recommendations for European policy-makers............................. 48 III.2.2 Value creation impact simulations.................................................. 50III.3 SMEs and financial markets ................................................... 51 III.3.1 Recommendations for policy-makers in Italy and Europe .............. 51 III.3.2 Value creation impact simulations.................................................. 53III.4 Natural disasters and terrorism ............................................... 55 III.4.1 Recommendations for European policy-makers............................. 55 III.4.2 Value creation impact simulations.................................................. 55Conclusion: Recommendations and impacts: an integrated vision.............. 57 THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  7. 7. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  8. 8. 7 THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and EuropePremise: The purpose and subject of the research projectThe context of discontinuity and drastic change affecting national economies in ourtime requires Italy like other countries to engage in serious consideration of the chal-lenges that lie ahead, to ensure an adequate welfare system in the long run togetherwith substantial and sustainable economic growth.Sound understanding of the insurance industry and its potential is essential to theproper design of policies to increase the growth rate and ensure the long-term devel-opment of the national and European economic and financial system.A key to fostering the systemic advance of Italy is certainly capitalising on the newneeds of society in many fields (welfare, health, assistance, income security duringand after one’s work career), where practicable transforming them from a cost to gov-ernment into a growth opportunity for new markets. The insurance industry can actupon some of these points, provided that we look thoroughly into the role of the Stateand the function of services.Broader and more intelligent recourse to insurance can contribute to the entire healthand welfare system, freeing public resources and managing private resources moreefficiently. A public-private partnership, for instance, could contribute significantly tothe more efficient allocation of resources now drawn from general tax revenue for nat-ural disaster relief and compensation.Italian firms could better guard against unexpected risks by using “contingent” capitalthat can be acquired via insurance instruments, thus utilising their own risk capital inmore efficient fashion.Insurance makes the most of the “culture of merit”, in that it rewards the most efficientagents, i.e. those that manage risk more carefully. Greater resort to insurance wouldmake no small contribution to enhancing the merit orientation of the entire society.However, rethinking and capitalising on the insurance industry’s potential contributionto Italy and to Europe requires a synergistic effort involving national and Communityinstitutions alike.This vision, with the opportunities implicit in it, needs to be communicated clearly andscientifically documented to Italian and European policy-makers, to help them realisehow to use and regulate the insurance industry in a modern and above all efficientmanner.On these premises, this research project brings out the fundamental contribution thatthe insurance industry can make to the achievement of certain objectives of growthand economic development. It sets forth a number of practical proposals and guide-lines for coverage of risks, sustainability and growth in four highly topical areas thathave a vital bearing on welfare and growth:– the pension system;– health care;– SMEs and financial markets;– natural disasters and terrorism. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  9. 9. 8 THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe The project thus springs from the need to understand the role of the insurance indus- try in society and to identify courses of action for the future. This means an operation of “change management” to achieve a substantial modification of the attitudes of the Italian public on these themes. The project intends to bring the important role of the insurance industry to the atten- tion of market participants and of policy-makers in Italy and in the main European institutions. The objectives are: – to describe the state of the insurance industry in Italy and in Europe, referring where necessary to significant US benchmarks, with an analysis designed to pro- duce a strategic, competitive picture of the industry and its influence on the rest of the national economy; – to bring together the most significant writings of a large number of scholars of the industry, especially those that enjoy a substantial consensus, in order to produce a strategic model of the situation; – to formulate policy proposals that can actuate the potential of the insurance indus- try nationally and European-wide and to translate these proposals into key mes- sages to sensitise public opinion and government policy-makers in Italy and Europe. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  10. 10. 9 I. The role of the insurance system in value creation in Italy and Europe SECTION I THE ROLE OF THE INSURANCE SYSTEM IN VALUE CREATION IN ITALY AND EUROPEI.1 The size of the insurance sector: international comparisonThe importance of the insurance industry is conventionally measured as the ratio oftotal premiums to GDP (the insurance penetration index). This is higher than 10% inthe United States, against an average of 8.5% for the EU-25.14.0% 1995 FIGURE I.1 2004 12.7%12.0% Relative size of the insurance sector: 10.7% 10.6% Premium income/GDP (%)10.0% 9.8% 9.4% 8.5% 8.8% 8.6% 8.4%8.0% 7.5% 7.1% 6.7% 6.8% 7.0% 6.4%6.0% 5.7% 4.8%4.0% 3.5% 3.5% 3.3% 2.1%2.0% 1.6%0.0% Source: European House-Ambrosetti, based on CEA and EU25 EU15 EU10 Germany United France Italy Spain Poland Japan United OECD data. The OECD data for Japan and US are for Kingdom States 1995-2003The gap is wider in non-life insurance, where the ratio of premiums to GDP is above6% in the United States and below 3.5% in the EU-25. Excluding auto insurance,which is compulsory everywhere, the ratio stands at 4.7% in the U.S. and 2.2% in theEU-25.7.0% 1995 6.2% FIGURE I.2 20046.0% 5.7% Relative size of the insurance sector: Non-life premium income/GDP (%)5.0% 3.9% 4.3% 3.4% 3.8% 3.9%4.0% 3.4% 3.3% 3.3% 3.3% 3.3% 3.2% 2.9%3.0% 2.6% 2.1% 2.2% 2.1%2.0% 1.8% 1.8% 1.5% 1.1%1.0%0.0% Source: European House-Ambrosetti, based on CEA and EU25 EU15 EU10 Germany United France Italy Spain Poland Japan United OECD data. The OECD data for Japan and US are for Kingdom States 1995-20035.0% 1995 4.7% FIGURE I.34.5% 2004 Relative size of the insurance sector: Non-life premium 4.0%4.0% income net of auto insurance/GDP (%)3.5% 3.2%3.0% 2.8% 2.8% 2.6% 2.2% 2.3%2.5% 2.1% 2.2% 2.2% 2.0% 1.9%2.0% 1.6%1.5% 1.1% 1.2% 0.9% 1.0% 0.9%1.0% 0.7% 0.7%0.5% 0.4%0.0% Source: European House-Ambrosetti, based on CEA and EU25 EU15 EU10 Germany United France Italy Spain Poland Japan United OECD data. The OECD data for Japan and US are for Kingdom States 1995-2003 THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  11. 11. 10 I. The role of the insurance system in value creation in Italy and Europe Italy is one of the European countries where the insurance industry is least developed, and especially in the non-life sector, where, excluding auto insurance, premiums come to just 1% of GDP, less than half the European average and only one third of the ratio in Germany and Britain. FIGURE I.4 High Insurance penetration in Europe (2005). % EU15 average 6 Life sector reserves and non-life, non-auto premium income as % of GDP 5 Non-life premiums excl. auto/GDP 4 Germany United Kingdom 3 EU15 EU15 average 2 Spain France 1 Italy 0 0 20 40 60 80 100 120 %Source: European House-Ambrosetti, based on CEA and Low Low Life sector reserves/GDP High OECD data In life insurance, which has grown strongly in Italy in recent years, the situation is more diversified. Contrary to what many people think, life insurance does not mean simply death benefits but involves a broad range of instruments and financial prod- ucts, many of them designed for long-term saving. The development of the life sector in Italy, which began in the second half of the 1990s, has resulted in a significant rise in the ratio of premiums to GDP, which came to 5.2% in 2005, broadly in line with the European average, though below those found in the United Kingdom (the European leader at 9.4%), Belgium (8.5%) and France (7.1%). FIGURE I.5 10.0% 9.4% Life insurance premium income/GDP (%), 2005 9.0% 8.5% 8.0% 7.1% 7.0% 6.0% 5.2% 5.0% 4.9% 4.0% 3.2% 3.0% 2.3% 2.0% 1.0%Source: European House-Ambrosetti, based on CEA and 0.0% OECD data United Kingdom Belgium France Italy Netherlands Germany Spain Despite this rapid recent growth, the degree of maturity of the life insurance market, as measured by the ratio of mathematical reserves to GDP, is still limited.1 The indi- 1 Insurance companies accumulate mathematical reserves because the obligations of the insured (pre- mium payments) and those of the insurer (indemnity or benefits) do not correspond in time. The insurer’s obligation initiates the instant he receives the insured’s premium and lasts to the end of the coverage year. The mathematical reserve measures the insurer’s obligations vis-à-vis the insured. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  12. 12. 11 I. The role of the insurance system in value creation in Italy and Europecator rose significantly between 1996 and 2005, from 6.9% to 24.8% of GDP, but isstill well below its level in other European countries. The data thus confirm that theItalian insurance market is not yet mature, so there is still scope for growth in thelife sector.120.0% FIGURE I.6110.0% 107.3% Life insurance mathematical reserves/GDP (%), 2005100.0%90.0%80.0%70.0%60.0% 55.3%50.0% 48.3% EU15 average = 49% 42.9%40.0%30.0% 29.2% 24.8%20.0% 13.7%10.0% 0.0% Source: European House-Ambrosetti, based on CEA and United Kingdom France Netherlands Belgium Germany Italy Spain OECD dataI.2 Is the underdevelopment of the insurance industry grounds for concern?To answer this question, we need to see what factors limit the development of theinsurance sector, have an idea of how the context is changing, and reflect on theindustry’s characteristics and potential. A thorough analysis of the reasons for therelative lack of development of the insurance industry in Italy and, in some specificsub-sectors at least, in Europe will be provided in the next section. Here, we setforth the reasons why the insurance industry has a key role to play for the efficientoperation of the economy, contributing to growth and employment. Underdevelop-ment of the insurance industry can therefore be a factor inhibiting economicgrowth.I.2.1 How the frame of reference is changing: The “four challenges” of our timeOur epoch is one of constant, drastic change, often swift and unpredictable, whichinevitably affects business models and civil society. The global context is one ofceaseless, rapid evolution, involving such critical factors as:– continual scientific and technological advances (often revolutionary);– accelerated change;– globalisation;– the progressive modification of the demographic mix.In an era in which the only sure thing is uncertainty, these key concepts are a fun-damental point of reference for framing and understanding the increasingly impor-tant role of the insurance industry, and consequently grasping the need to beginrethinking our business and welfare models as a precondition for contributing con-cretely to robust economic growth and significant value creation in Italy andEurope. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  13. 13. 12 I. The role of the insurance system in value creation in Italy and Europe Each one of these factors would well repay thorough study. Here, we examine only the demographic question. In recent decades many industrial countries, Italy among them, have registered a significant reduction in birth rates and a substantial length- ening of life expectancy. In short, while the life cycles of products, processes, knowledge and skills have shortened, that of men and women has lengthened; and this has a major impact on the sustainability of the current model of welfare (pen- sions, health care, social assistance), which in Italy still depends heavily on the pub- lic sector. This has happened and is still happening at an intense pace, within a much shorter time span than that ordinarily required for social adjustment. I.2.2 The insurance industry and the evolution of risk The insurance industry is now experiencing a period of strong growth and rapid change all around the world. This transformation is intimately bound up with the constant evolution of the very concept of risk engendered by the present frame of reference, which affects firms and individuals, the private and the public sector alike. In market economies, every economic decision is characterised by a risk variable. That is, risk is an integral, intrinsic feature of business development, innovation and growth. However, it is a variable that can be controlled, managed or transferred to third parties. The insurance industry’s success has depended on its ability to manage and transfer risk, making it an invaluable partner for people who want to develop a business activity, protect themselves against harmful events, or ensure their welfare in the future. Within this logic, the insurance system is called on more and more frequently where an individual institution – private or public – cannot handle the new dimen- sions of risk (in connection, say, with disasters, terrorism, the long-run sustain- ability of the welfare system, or support for troubled small and medium-sized enterprises). The foregoing considerations suggest that in the future the insurance industry, together with other private parties and qualified institutional investors, can – or rather, must – play a crucial role of concrete support to State intervention on various fronts, through public-private cooperation (the “win-win” option). Actually, in Italy such syn- ergy has yet to develop, but in practice it is the obligatory choice. Insurance, in fact, is one of the most effective instruments ever devised for evaluating, managing and reducing risk on all levels, with advantages and benefits that are clearly and directly perceived by the insured themselves. Insurance, finally, fosters the cre- ation of a climate of legality, requiring transparency in transactions (collection of pre- miums and payment of compensation) and employing significant resources to curb insurance fraud. Thus insurance has great social value and contributes palpably to the provision of strategic assets for the society as a whole THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  14. 14. 13 I. The role of the insurance system in value creation in Italy and Europe FIGURE I.7 THE INSURANCE INDUSTRY PROVIDES SIX STRATEGIC ASSETS TO SOCIETY The social value of insurance EFFICIENCY/ FREEDOM SECURITY HEALTH WEALTH FLEXIBILITY LEGALITYTo enjoy one’s At home and Greater Support for Making Greater wealth while at work, investment in the entrepre- economic and efficiency covered against health care neurial social life less thanks to against accidents, and access culture dependent on better risk unexpected crime, fire to better and for the State management; events and natural services innovation enhanced disasters legality thanks to fiscal transparency and anti-fraud action Source: European House-AmbrosettiI.3 How the insurance industry can foster economic growthThe insurance industry can make a significant, indispensable contribution to the cre-ation of value for businesses, for society, and for the country as a system. THE INSURANCE INDUSTRY’S CONTRIBUTION TO VALUE CREATION FIGURE I.8 The insurance industry’s contribution to value creationENCOURAGEMENT OF SOCIAL BETTER FINANCIAL CAREFUL RISK STABILISATION OFENTREPRENEURSHIP PROTECTION INTERMEDIATION MANAGEMENT CONSUMPTION Business insurance Provision of a As an institutional Thanks to risk Guaranteeing stable frees resources, “second pillar” in investor, the evaluation income over the life encouraging addition to public insurance sector instruments, cycle, insurers helpadditional investment, social protection, helps improve and insurers can provide stabilise consumption, research significantly reducing develop financial incentives for greater stimulating growth and innovation and public expenditure markets and facilitates precautions and and stabilising the thus making the firms’ access sustainable economic cyclemarket more dynamic to capital resource use and competitive RISK POOLING AND TRANSFER Source: European House-AmbrosettiIn order for the industry to play a truly important role in support of Italian social andeconomic development, two things are necessary:– overcoming the idea of the central role of the State as responsible for all basic public services (health, pensions, disaster coverage). Unfortunately, that idea is still strongly rooted in Italian society;– changing the traditional popular view of the insurance industry: there is a very broad lack of awareness of the sector’s role in the economy. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  15. 15. 14 I. The role of the insurance system in value creation in Italy and Europe For systematic analysis of the strategic instruments upon which the insurance indus- try can really count, in order to grasp its effective scope for serving the purposes of economic growth and national development, what follows highlights the close rela- tionship between the industry’s potential and the guidelines for relaunching the Lisbon strategy.2 FIGURE I.9 MACROECONOMIC GUIDELINES:Integrated guidelines for growth and jobs (2005-2008) to relaunch the Lisbon Strategy 1. To secure economic stability. 2. To safeguard economic sustainability. 3. To promote an efficient allocation of resources. 4. To promote greater coherence between macroeconomic and structural poli- cies. 5. To ensure that wage developments contribute to macroeconomic stability and growth. 6. To contribute to a dynamic and well-functioning EMU. MICROECONOMIC GUIDELINES: 7. To increase and improve investment in R&D, in particular in the private sector with a view to creating a European knowledge area. 8. To facilitate innovation in all its forms 9. To facilitate the take-up of ICT and construct a true information society. 10. To strengthen the competitive advantages of the industrial base. 11. To encourage the sustainable use of resources and strengthen the synergies between environmental protection and growth. 12. To extend and deepen the internal market. 13. To ensure open and competitive markets within and outside Europe and reap the fruits of globalisation. 14. To create a more competitive business environment and encourage private ini- tiatives to improve regulation. 15. To promote a more entrepreneurial culture and create a supportive environ- ment for SMEs. 16. To expand and improve European infrastructure and complete agreed priority cross-border projects. EMPLOYMENT GUIDELINES 17. To implement employment policies aimed at achieving full employment, improving quality and productivity at work, and strengthening social and terri- torial cohesion. 18. To promote a life-cycle approach to work. 2 Recognising the Strategy’s scanty achievements since 2000, the Council of Heads of State and Gov- ernment decided on a resolute relaunching of the Lisbon Strategy to respond to the challenges of the 21st century, focusing on two key objectives: economic growth and employment, as laid down in the “Integrated guidelines for growth and jobs” for EU member states. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  16. 16. 15 I. The role of the insurance system in value creation in Italy and Europe 19. To ensure inclusive labour markets, making work more attractive and making it financially attractive for job-seekers and disadvantaged people. 20. To improve matching of labour market needs. 21. To promote flexibility combined with employment security and reduce labour market segmentation, taking the role of the social partners into account. 22. To ensure employment-friendly wage and other labour cost developments. 23. To expand and improve investment in human capital. 24. To adapt education and training systems in response to new competence requirements. Source: European CommissionI.3.1 Thanks to its broad range of business services, the insurance indus- try can help improve business transparency and financial manage- mentInsurance enables firms to grow and deal adequately with risk without having to buildup precious reserves of capital. Appropriate insurance is particularly advantageous forsmall enterprises, which by nature have limited capital and face greater difficulty inobtaining access to the financial markets. Without an adequate insurance system, infact, they would need very substantial funds to guard against risks, and for manysmall and medium-sized companies it would be difficult and highly costly to procurethis capital. In other words, it would be a brake on growth. Instead, an effective, effi-cient insurance system enables businesses to free resources from coverage againstrisk and allocate them to growth, with a clear improvement in financial management.The insurance system also performs the function of guaranteeing the vitality of themyriad small and medium-sized enterprises that make up so much of the Italian eco-nomic fabric, covering a part of business risk and capitalising on the firms’ assets.I.3.2 Rewarding entrepreneurial aptitude, the insurance industry encour- ages more investment and propensity to innovate, hence a more dynamic marketFor firms, the pursuit of business growth and innovation means taking risks. This inturn is strictly related to the intensity of innovation, hence how dynamic the market is.In economics, the propensity to risk is considered as a scarce resource. In this frame-work, the intended contribution of the insurance industry can be interpreted on threedifferent levels:– promoting the culture of risk management and helping firms to achieve profes- sional risk management;– inducing businesses to improve and extend risk prevention measures;– designing coverage that is better configured for the real needs and characteristics of firms.Insurance, that is, performs the task of containing risks for firms. Well developedinsurance markets optimise the allocation of the scarce resource of risk-taking, con-centrating it in the most innovative, high-potential sectors. Under-insured companiesgenerally fail to seize new business opportunities, they invest less in innovation, andtheir international market presence tends to be weaker. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  17. 17. 16 I. The role of the insurance system in value creation in Italy and Europe The risk transfer function performed by insurance helps on the one hand to create a more stable business environment for firms and on the other to reduce the amount of capital they need for risk protection. This enables firms to free up additional resources and concentrate on their core business, specifically: increase and improve investment in R&D (Guideline 7); facilitate innovation, developing and marketing new products (Guideline 8); extend or consolidate their business in other markets within and outside the European Union (Guidelines 12 and 13). Insurance activity can also improve the environment for SMEs (Guideline 15) and offer a “safety net” in the event of difficulties, thus helping to ensure economic stabil- ity for households and firms (Guideline 1). I.3.3 Insurance can ease the pressure on the public system, offering sup- plementary social protection There is a mounting debate throughout the industrial world on the need to rethink the State social security system. In the face of the changing demographic structure in Europe, with greater life expectancy, the progressive ageing of the population and lower birth rates, it is necessary to give citizens an adequate social welfare model, i.e. more efficient, complete and sophisticated services both in health care and in retire- ment provision. This is an increasingly hard task for the State, which cannot count on limitless resources. On health care, consideration needs to be given to striking a new, more efficient bal- ance between State intervention and the market, one that can favour the development of firms and the creation of jobs in the sector and at the same time lead to a lasting, sustainable reduction in the fiscal burden. In this context, the structural support of pri- vate entities, such as insurance companies, becomes indispensable. They must con- tribute to the development of a “second pillar” to flank the social protection offered by the State and capitalise on emerging social needs, where possible converting them from costs into opportunities for growth. Finally, by providing supplementary products, the insurance industry can help guaran- tee stable incomes throughout life (Guideline 18) and mitigate the impact of demo- graphic change on the public finances, thus safeguarding economic sustainability (Guideline 2). I.3.4 The insurance sector can help create liquidity and mobilise savings, foster financial intermediation, raise and channel substantial finan- cial resources and facilitate firms’ access to capital With investments totalling almost €6 trillion, insurance companies are among the leading institutional investors in Europe. Insurers and businesses have a shared inter- est in the development of a modern, competitive insurance market that can facilitate corporate fund-raising and offer a broad range of investment opportunities. Insurance companies can help create more liquidity and mobilise savings. They can help foster fund-raising and financial intermediation and can channel massive resources to the financial market. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  18. 18. 17 I. The role of the insurance system in value creation in Italy and EuropeAs an institutional investor the insurance industry thus makes an invaluable contribu-tion to the development and better working of the capital market. The financial systemin general – and within it the insurance system – plays a fundamental role in severalrespects. It supplies long-term funds, smoothing out the effects of demographicdynamics and increasing investment opportunities.An impulse to making the industry’s contribution to the financial markets more effi-cient will come from the planned Solvency II directive, which offers incentives for bet-ter risk measurement and management by insurance companies and removes thearbitrary limits on investment in place in many member states.Finally, a sounder, more dynamic, competitive financial market also contributes tosustainable economic growth (Guideline 4).I.3.5 The insurance industry helps foster a sensible risk stance on the part of individuals and firmsThe evaluation of risks made by the insurance industry is reflected essentially in thecosts and terms of insurance policies. In this way, the insured have an incentive tolower their risk profile, to prevent or at least limit the potential loss. This encouragesvirtuous conduct, which results in the responsible and sustainable use of resources,public and private alike. This virtuous process also affects investment decisions, con-tributing to the sustainable growth of the economy and the advance of the society. Insummary, insurance companies not only provide a more stable socio-economic envi-ronment in which to do business but also help sensitise operators to risk manage-ment.In the same way, differentiated contract terms for policies are decisive factors inhouseholds’ decisions as well, helping to foster more intelligent attitudes, oriented tothe sustainable use of the resources available (Guideline 11).I.3.6 Insurance helps smooth consumption over people’s life cycleConsumption, which accounts for two thirds of GDP, is one of the main drivers of eco-nomic growth for the country and of welfare for individuals. But worries over the sus-tainability of today’s model of welfare put pressure on earnings and therefore house-hold consumption.Through social protection products (health insurance and workplace accident poli-cies), the insurance industry offers risk coverage against adverse events, provideseconomic resources in case of necessity and permits the stabilisation of income levelsover the course of the individual’s life cycle. The result is greater stability in consump-tion.In a word, the insurance industry can therefore contribute significantly to a life-cycleapproach to work (Guideline 18). THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  19. 19. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  20. 20. 19 II. The insurance industry and its value for growth SECTION II THE INSURANCE INDUSTRY AND ITS VALUE FOR GROWTHAs an institutional investor and with its expertise in risk evaluation and management,the insurance industry is a key actor, one that can work alongside the public sector inan effective, synergic relationship to support the growth of the economy in Italy and,more broadly, in Europe.The scope for action by the insurance industry is vast. This study focuses on fourareas of fundamental importance for the country’s prospective welfare and growth:pensions, health, small and medium-sized enterprises (SMEs) and the financial mar-kets, and natural disasters and terrorism. In these four areas the insurance industrycan concretely demonstrate its value for the growth of the economy and of employ-ment. FIGURE II.1 The insurance industry and its value for growth Pensions SMEs and Health financial markets Natural disasters and terrorism Source: European House-AmbrosettiFollowing the overview of the insurance environment in Italy and Europe, the presentsection focuses on the four fields mentioned above, adopting a single interpretativekey to cite evidence highlighting the magnitude of each phenomenon, identify criticalissues and the challenges that lie ahead.Section III will concentrate on recommendations for policymakers in Italy and Europe,setting out, for each area, concrete suggestions, proposals and guidelines aimed atreleasing the insurance industry’s potential on behalf of growth and development inItaly (and Europe). It also contains simulations of the possible consequences for valuecreation. These rough-and-ready estimates, for which no claim of scientific rigour isasserted, measure the resources that could be freed up for new investment and thesavings in public expenditure that could derive from greater penetration of the insur-ance industry in the target areas of intervention. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  21. 21. 20 II. The insurance industry and its value for growth II.1 The outlook for the social security system The social security system is one of the pillars of the modern state, guaranteeing an adequate protection for people who have ended their working career because of age or are temporarily or permanently unable to continue to work owing to sickness or acci- dent. In such circumstances workers are entitled to receive a monthly payment of an amount that should allow them to maintain a standard of living similar to that they enjoyed during their working years. Social security is a State-centred system. The main features of the public pension (or basic pension) system can be summarised as follows: 1. registration is mandatory for all workers; 2. to be eligible for social security benefits, workers must pay a sum of money, which for payroll employees is withheld from wages (“social security contributions”). Contributions are also paid in by employers; 3. the basic pension system is financed on a pay-a-you-go basis. Current workers pay in the contributions needed to finance pension disbursements to retirees. In the past decades demographic, social and macroeconomic factors have combined to drive up the ratios of pension expenditure to GDP. In Italy pension expenditure rose from 5% of GDP in 1960 to 13% in 1990 and continued to gravitate upwards to 14.7% in 2004. FIGURE II.2 16% Total pension expenditure in Italy as a % of GDP (1960-2004) 14% 12% 10% 8% 6%Source: European House-Ambrosetti, based on Eurostat 4% and Bank of Italy data 1960 1965 1970 1975 1980 1985 1990 1995 2000 Pension expenditure has increased in all the countries of Europe. However, its ratio to GDP in Italy is higher than the European average (12.3% for the EU-15) and than in the other major European countries (13.3% in Germany, 13.1% in France, 10.7% in the United Kingdom and 9.2% in Spain). THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  22. 22. 21 II. The insurance industry and its value for growth16% FIGURE II.3 Total pension expenditure in selected EU countries as a 14.7% % of GDP (2004)14% 13.3% 13.1% 12.9% 12.6% EU-15 average, 12.3%12% 11.1% 10.7%10% Source: European House-Ambrosetii, based on Eurostat 9,2% data, 20078% N.B. The data includes long-service pensions, early long Italy Germany France Netherlands Sweden Belgium United Spain service pensions, disability pensions and early retirement Kingdom benefits for occupational disabilitiesOne must also bear in mind that Italy’s ratio of public debt to GDP is by far the highestin the European Union. FIGURE II.4110% 106.8% Public debt in selected EU countries as a100% % of GDP (2004) 89.1%90%80% 67.9%70% 63.9%60% 48.7% 46.9%50% 45.5% 39.9%40%30%20%10% 0% Italy Belgium Germany France Netherlands Sweden United Spain Source: European House-Ambrosetti, based on Eurostat Kingdom data, 2007In order not to jeopardise the sustainability of the public finances, in the past fifteenyears the governments of many European countries, including Italy, have put in placecorrective measures aimed at curbing pension expenditure. Correction has beenachieved by gradually modifying pension eligibility requirements, pension benefits orboth.With a view to ensuring adequate income protection for pensioners, many countrieshave also adopted policies to foster the development of supplementary pension plansand the consequent creation of a system in which the monthly amount of benefits apensioner receives consists of two distinct components:– a public pension;– a supplementary, private pension. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  23. 23. 22 II. The insurance industry and its value for growth II.1.1 The public pension system The reform of the social security system, decided in Italy over the last fifteen years, has involved an increase in the age at which workers are entitled to basic benefits and a decrease in benefit amounts, especially for future pensions. Benefits have been reduced through changes in the pension calculation method. In particular, depending on when a person began to work, the method can be Pay As You Go (based on the earnings received by the worker during his working years) or fully funded (based on the contributions paid in and set aside on notional accounts).1 The earnings-based system applies to workers with at least 18 years of contributions as of 31 December 1995, the contributions-based system to those who began to work from 1 January 1996 onwards. For workers with fewer than 18 contribution years as of 31 December 1995, benefits are calculated with a “mixed system” (earnings-based up to 31 December 1995 and contributions-based there- after). According to some forecasts,2 for the public pension system the income replacement rate – that is, the ratio of a worker’s pension benefit to his last earnings – will decline from 67.3% in 2000 to 48.1% in 2050 for private-sector employees aged 60 with 35 years of contributions. The effects on the spending power of future pensions can be easily imagined. FIGURE II.5 80% Forecast replacement rate of basic pension for private- 67.3% 67.1% 70%sector employees aged 60 with 35 years of contributions 56.0% 60% (% of final earnings) 49.6% 48.5% 48.1% 50% 40% 30% 20% 10%Source: European House-Ambrosetti, based on Rapporto 2000 2010 2020 2030 2040 2050di strategia nazionale sulle pensioni, prepared in 2002 by Ministero del Lavoro e delle Politiche Sociali Income replacement rate of basic pension for private-sector employees Despite the reduction in future public pension amounts and the gradual increase in retirement age, the forecasts made by the State Accounting Office at the end of 2006 indicate that the ratio of pension expenditure to GDP will keep on rising until it peaks 1 Since the public pension system is financed on a pay-as-you-go, not a funded basis, the contributions periodically paid in by the worker are not actually banked or accumulated but are used instead to pay for cur- rent pensions. However, they are taken into account for the purpose of determining the worker’s benefit amount upon retirement. 2 Rapporto di strategia nazionale sulle pensioni, a 2002 pension reform strategy report prepared by the Ministry of Labour and Social Policies. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  24. 24. 23 II. The insurance industry and its value for growthat 15.1% in 2040, when the system will be almost entirely contributions-based; it willdecline thereafter, to 13.8% in 2050. The projected “pension hump” is depicted in thefigure below.316% FIGURE II.6 Pension expenditure as a percentage of GDP 15.1% (2005-2050): the pension “hump”15% 14.8% 14.3% 14.2% 14.1%14% 13.8% Source: European House-Ambrosetti, based on data13% published by the State Accounting Office in its national 2005 2010 2020 2030 2040 2050 scenario, December 2006The State Accounting Office forecasts assume unchanged legislation, that is to saythey take into account both the enacted “big step” raising the minimum retirement ageto 60 for everyone as of 1 January 2008 and the ten-yearly revision, mandated by Law335/1995, of the coefficient for converting contributions accrued under the contribu-tions-based system into benefits. It does not take account of the legislation passed in2007 or of possible future measures to boost low pensions.The forecasts may require far-reaching revisions if the pension rules are changed as aresult of negotiations with the social partners and parliamentary action, and in particu-lar if it is decided not to update the conversion coefficients.Over-65s make up a considerable part of the population. From 6% at the turn of thetwentieth century, their share has risen to nearly 25% and, extrapolating the cur-rent trends, will reach 29% in 2020 and 47% in 2050 (Eurostat projections, base2004). Even today, there are more people over age 65 than people under age 20; by2050 there will be more than three times as many (25 million and 8 million respec-tively).In addition, according to Istat, the life expectancy of the average 65-year-old malelengthened from 14.2 years in 1992 to 18.5 years in 2005.The prospects, then, are for pension expenditure to place an even heavier burden onthe public finances. 3 The State Accounting Office forecasts include disability, old-age and survivors pensions, net oflump-sum benefits and non-contributory welfare pensions. Unlike the data used in the international com-parison (which Eurostat classifies in terms of an old-age function), the State Accounting Office does notinclude some non-pension benefits, e.g. benefits deriving from the interruption of an employment rela-tionship. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  25. 25. 24 II. The insurance industry and its value for growth II.1.2 Supplementary pension plans From this angle, private pension plans are an indispensable “corrective” instrument to provide a substantial supplement to the benefits guaranteed by social security and to ensure future pensioners adequate total retirement income. In a broader perspective, supplementary pensions are a fundamental instrument that can bring major, concrete advantages to different actors. FIGURE II.7 INDIVIDUAL ECONOMIC SYSTEM Supplementary pension provision and its advantages ADVANTAGES More scope for adapting Funded systems are better pension cover to the needs able to withstand demographic of individual workers STATE change Higher returns on Development of financial markets: contributions than delivered Diversification of longevity risk accumulated savings are invested in the past by company’s on the financial markets in the severance pay funds Adjustment of the public finances and quest for higher returns tax burden Ensured long-term savings, Impetus to the economy: Creation of a more efficient system of generally up to retirement age. competition between financial social protection Long-term savings are more institutions offering pension plans Source: European House-Ambrosetti, based on data in able than traditional savings Increase in public resources for improves portfolio allocation, to allow workers to enjoy infrastructure construction, to the benefit of plan members,Giancarlo Morcaldo, “Pensioni, necessità di una riforma”, adequate living standards technological innovation and human overall resource utilisation and 7 March 2007 after retirement capital formation economic growth Recent years have seen a general growth in supplementary pension plans throughout Europe in terms of assets under management and number of participants, with a slow but steady change in the composition of households’ financial portfolios. In the euro area, life insurance reserves (which include both life policies proper and pension funds) rose from 21.2% of households’ total financial portfolio in 1997 to 25.5% in 2006.4 The European Central Bank estimates that investments in life insurance policies and pension funds were equal to about 6% of households’ disposable income in 2006. In Italy, participation in supplementary pension plans is voluntary and the eligibility conditions for participation and to receive benefits are established by law. The plans operate on a funded basis, in which the worker and the employer pay in amounts (contributions) that are invested by fund managers on the financial market. Essentially, there are three types of supplementary pension plan: – occupational pension funds, instituted by collective agreements negotiated by labour unions and trade associations at national level or by labour and manage- ment at company level; 4 European Central Bank, Monetary Statistics 2006. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  26. 26. 25 II. The insurance industry and its value for growth– open pension funds, available to all workers and promoted by financial institutions authorised by law to manage pension funds, i.e. banks, investment firms, asset management companies and insurance companies;– individual pension plans, an insurance-type product.Workers can enrol in supplementary pension plans individually or, in the case of pen-sion funds, collectively. The new legislation (Legislative Decree 252/2005), whoseentry into force was moved up to 1 January 2007,5 establishes equivalent treatment ofthe different types of supplementary plan.Despite the growth trend, documented by the Figure II.8, supplementary pensionplans have yet to attain the scale needed to transform the Italian pension system into a“multi-pillar” model. According to Covip, the pension fund supervisory authority, atthe end of 2006 13.9% of those eligible to enrol in occupational pension funds hadactually signed up. % Change FIGURE II.8 1,700 1.700 1.700 2,129 2.129 2.129 2,362 2.362 2.362 2,567 2.567 2.567 2,731 2.731 2.731 3,004 3.004 3.004 3,259 3.259 3.259 11% Number of members of supplementary pension plans100% - (thousands) 219 390 90% 555 685 From 2001 592 818 948 34% 80% 613 70% 614 611 602 60% 658 666 2% 223 287 50% 338 365 382 382 440 40% 12% 30% 886 886 1,010 1.010 20% 1,021 1.021 1,038 1.038 1,063 1.063 1,146 1.146 1,205 1.205 5% 10% 0% 2000 2001 2002 2003 2004 2005 2006 CAGR* Source: European House-Ambrosetti, based on Bollettino Closed pension funds Open pension funds Pre-existing pension funds Individual pension plans Statistico Mefop, No. 25, June 2007 * CAGR: Compound Average Growth RateA variety of factors may be responsible for the as yet limited development of supple-mentary pension plans in Italy, including:– insufficient awareness, especially among younger workers, of the radical changes under way;– scant knowledge on the part of workers about the pension system in general and their own pension position in particular;– the greater confidence workers have in keeping accruing severance pay with their company than in investing it in pension funds and the financial market;– the strong asset base of Italian households.Savings, accumulated severance pay, buildings and annuities of various kind are con-sidered “improper” but effective means of supplementing the basic pension, not leastin view of the scant resources allocable to supplementary pension plans owing to the 5 The entry into force of Legislative Decree 252/2005, originally scheduled for 1 January 2008 forboth its general provisions and its tax aspects, was advanced to 1 January 2007 by Legislative Decree279/2006. The contents of Legislative Decree 252/2005 were consequently inserted into the text of the Fi-nance Law for 2007. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
  27. 27. 26 II. The insurance industry and its value for growth high rate of contributions to the compulsory pension fund for private-sector employ- ees (33%) and to severance pay funds (6.91%). Legislative Decree 252/2005 allows employees to assign accruing severance pay to one of the different forms of supplementary pension provision with an explicit, irrevocable declaration. Where a worker makes no declaration, accruing pension pay is assigned as provided for by contracts or collective agreements, including those made at company level. An employee may transfer his own supplementary pension position to any other form of supplementary plan, but not back to his company’s staff severance pay fund. As regards the possibility of continuing to receive his employer’s contribution to the accruing flow, the worker’s freedom of choice is restricted to the procedures established by contracts or collective agree- ments. To encourage workers to enrol, Legislative Decree 252/2005 expands the tax deductibility of contributions and lowers the taxation of benefits. Initial estimates as of 30 June 2007 counted just under 400,000 new explicit regis- trants with occupational funds, i.e. about 4% of the potential new members. Most employees, and three quarters of those who made an explicit option, had decided not to enrol in a supplementary plan. Some observers feel it is highly unlikely that the tar- get of 40% for explicit options can be reached by the end of the year, even counting new registrants in open and individual retirement schemes.6 If this figure is reached, it will only be thanks to tacit agreement, the data on which will not be available until the end of September. The projections for the evolution of the Italian pension system and the crucial importance of supplementary pension provision suggest that closer attention should be paid to the role that private-sector actors, first and foremost the insur- ance industry, can play in helping to build a serene future for pensioners by guar- FIGURE II.9 2,900 2.900 2,954 2.954 7,614 7.614 30,546 30.546 44,014 44.014 Supplementary pension plans: assets by type 100% of intermediary, 2005 90% 80% 70% 60% 60% 61% 60% 76% 85% 85% 50% 100% 100% 40% 30% 20% 40% 40% 39% 10% 24% 15% 15% 0% Individual Open pension Pre-existing Occupational Total pension plans funds pension funds pension funds supplementary pension plansSource: European House-Ambrosetti, based on Fact-packPrevidenza ANIA, January 2007, and Bollettino Statistico Mefop, No. 25, June 2007 Insurance companies Other intermediaries 6 See among others Marcello Messori and Tito Boeri, “Previdenza complementare: un decollo senza I giovani”, 6 August 2007, www.lavoce.info. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe

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