• Save
The contribution of the insurance industry to economic growth in italy and europe
Upcoming SlideShare
Loading in...5
×
 

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

on

  • 3,678 views

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

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

Statistics

Views

Total Views
3,678
Views on SlideShare
3,677
Embed Views
1

Actions

Likes
0
Downloads
0
Comments
0

1 Embed 1

http://www.linkedin.com 1

Accessibility

Upload Details

Uploaded via as Adobe PDF

Usage Rights

© All Rights Reserved

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Processing…
Post Comment
Edit your comment

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

    • THE CONTRIBUTION OF THE INSURANCE INDUSTRYto economic growth in Italy and Europe
    • THE CONTRIBUTION OF THE INSURANCE INDUSTRYto economic growth in Italy and Europe
    • 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).
    • 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
    • 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
    • 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
    • THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 27 II. The insurance industry and its value for growthanteeing substantial additional retirement income and an adequate income replace-ment rate.In Europe, insurance companies play a key role by offering insurance policies andmanaging pension funds. In Italy, the insurance industry has very considerable weightin the supplementary pension system, managing about 39% of total fund assets.Already today and even more in the future, insurance companies have a large role andmajor responsibility in the provision of supplementary pension benefits (see SectionIII.1.2).II.2 Towards a new health care systemII.2.1 Evolution of the National Health Service in ItalyItaly’s National Health Service was instituted by Law 833/1978. In 1993 the increasingneed for cost control led to the first reform of the system,7 followed in 1999 by furthermeasures reconfiguring its organisation.8Following the passage of legislation introducing fiscal federalism, the funding of theNational Health Service was radically reformed and put on an essentially regionalbasis, with revenues coming from regional taxes, surtaxes and revenue-sharing.9 Fis-cal federalism made regions directly accountable for compliance with the domesticstability pact; Law 405/2001 established mandatory rules and standards they mustcomply with in return for operational and organisational autonomy in the health sec-tor.The unifying element enabling the system to remain national in character after its fed-eralist revamping consists in the essential assistance standards that are established atnational level to ensure uniform, appropriate and cost-effective essential care for allcitizens.10 All regions must at least meet the essential assistance standards that wereapproved in the State-Regions Conference of 22 November 2001, but are free to sethigher levels of minimum care and services. 7 The “De Lorenzo-Garavaglia Reform” consisted of Legislative Decree 502/1992 (“Reordering of theprovisions concerning health care”), issued pursuant to Article 1 of Law 421/1992, and Decree Law 29/1993(“Rationalisation of the organisation of general government entities and revision of the provisions on publicemployment”), issued pursuant to Article 2 of Law 421/1992. 8 The “Bindi Reform” was embodied in Legislative Decree 229/1999 (“Provisions for the rationalisationof the National Health Service”), issued pursuant to Article 1 of Law 419/1998. 9 Legislative Decree 56/2000 on fiscal federalism identified new sources of finance for the NationalHealth Service, namely the regional tax on productive activities (Irap), the regional personal income surtaxand regional revenue sharing in value-added tax and petrol excise taxes. 10 Decree of the Prime Minister, issued on 29 November 2001. Essential assistance standards definethe types of care that must be delivered efficiently and appropriately in a uniform manner to all citizensthroughout Italy. They are established by the central government pursuant to Title V of the Constitution asamended. Along with adopting these national standards, the central government also appropriates the finan-cial resources for health care consistently with the framework established in its Economic and Financial Plan-ning Document. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 28 II. The insurance industry and its value for growth II.2.2 Public and private health spending in Italy “Health” accounted for 24.3% of total social protection expenditure in Italy in 2005, followed by “assistance” with 8.1%. Fully 67.6% of all social protection expenditure goes to pensions.11 Health spending consists of households’ total consumption of health care goods and services (acquired directly or dispensed by the National Health Service). Simplifying, we can divide health expenditure into: – public expenditure, incurred by the National Health Service; – private expenditure, households’ direct purchases on the market. Between 2000 and 2006 annual public expenditure on health care rose by €34.8 bil- lion, from €67.5 billion to €102.3 billion.12 Its compound average growth rate (CAGR) was equal to 7.2% (see Figure II.10). Over the same period, annual private expenditure on health care increased by €8.1 billion, from €22.3 billion to €30.4 billion,13 or at a compound average growth rate of 5.3%. The private component rose more slowly than the public component owing to the elimination of patient co-payments by many regions. Including private expenditure, total annual spending on health care in Italy thus amounts to more than €132 billion, or 8.9% of GDP. Population ageing and scientific and technological advances contribute to the growth in the demand for health services, determining progressively rising expenditure. At 6.6% in 2005 and 6.9% in 2006, the ratio of public health spending to GDP in Italy is basically in line with the European average (7.2%) but distinctly lower than in Germany (8.8%), France (8.1%) and Sweden (8.6%). In sharp contrast with the other industrial countries, the United States spends a total of 15.3% of GDP on health care, with a much larger private component (8.5% of GDP, against 2% in Italy) but a public component (6.8% of GDP) comparable to the European average. In Italy, as in the other European countries, the public component exceeds the private component (Figure II.11). Two features most clearly distinguish Italian private health care expenditure from that of the other main industrial countries: – its apparently compensating trend with respect to the behaviour of public health care expenditure; and 11 ISTAT. Statisctic Yearbook, 2007. 12 OECD, 2007. 13 OECD, 2007. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 29 II. The insurance industry and its value for growth– the fact that it consists for the most part of direct out-of-pocket expenses and is less intermediated by insurance or health care plans than in other countries (Fig- ure II.12). FIGURE II.10140,000 132,786 Public and private health expenditure in Italy 126,651 30,408120,000 112,983 29,636 105,044 101,454 24,486 96,061100,000 89,938 23,863 22,628 21,317 re: 5.3% 22,364 penditu 80,000 alth ex rivate he 60,000 CAGR p .2% xpend iture: 7 40,000 ublic health e CAGR p 102,378 20,000 67,574 74,744 78,826 81,181 88,497 97,015 0 2000 2001 2002 2003 2004 2005 2006 Source: European House-Ambrosetti, based on OECD Public health expenditure Private health expenditure Total health expenditure data, 2007Channelling these enormous flows of private expenditure according to a prevention-and insurance-based approach can be a major objective for public-private partnershipin the health sector.16% FIGURE II.11 International comparisons (data as % of 2005 GDP)14% EU15 average 7.2%12% 8.5%10% 2.5% 2.2% 1.5% 1.6% 4.1% 2.3% 8% 1.2% 1.7% 2.0% 2.3% 6% 2.1% 8.8% 8.6% 4% 7.9% 8.1% 6.8% 7.2% 6.8% 7.2% 6.6% 6.6% 5.7% 5.1% 2% 0% Source: European House-Ambrosetti, based on OECD Austria Denmark France Germany Ireland Italy Netherlands Spain Sweden United United EU-15 Kingdom States average data, 2007, and OECD, “Projecting OECD Health and Long-Term Care Expenditure: What are the Main Public health expenditure Private health expenditure Drivers?”, 2006 THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 30 II. The insurance industry and its value for growth FIGURE II.12 100%Percentage breakdown of health expenditure by source of 90% financing, OECD countries (2004) 80% 70% 60% 50% 40% 30% 20% 10% 0% United Kingdom USA Greece Netherlands Poland Canada Spain OECD Italy Germany France Japan Sweden Luxembourg Source: European House-Ambrosetti, based on OECD Health Data, 2006. Data for health insurance in Sweden and United Kingdom are not available. Public expenditure Out-of-pocket expenditure Private health insurance Other private expenditure II.2.3 The outlook for health and long-term care expenditure Looking ahead, available estimates indicate that Italy’s public finances will come under growing pressure from health care spending. The OECD forecasts a sharp increase in public health care spending in Italy between 2005 and 2050, larger than in the other main European countries or the United States.14 In particular, Italian public health spending excluding that for long-term care is projected to increase from 6.0% of GDP in 2005 to 9.7% in 2050, assuming that expenditures grow 1 percentage point a year faster than GDP, as they have over the past two decades; spending would rise to only 7.9% instead if it were significantly compressed as the result of unspecified policy measures. Public spending for long-term care would expand from 0.6% of GDP to 3.5% in the worse (cost-pressure) scenario, to 2.8% in the better (cost-containment) scenario. The growing impact of long-term care on total public health expenditure is not con- fined to Italy. Even in the less pessimistic scenario, the average for the EU-15 would double over the same period, from 1.3% to 2.6% of GDP and for the United States from 0.9% to 1.8%. Similar trends at national level are also forecast for the other main EU countries (Figure II.13). The growth in spending for long-term care is driven by both demographics (popula- tion ageing, increasing longevity) and other factors (including technology-determined rising costs for increasingly sophisticated medical treatment). 14 “Projecting OECD Health and Long-Term Care Expenditures: What are the Main Drivers?”, OECD Eco- nomics Department Working Paper 477, 2006. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 31 II. The insurance industry and its value for growth FIGURE II.13 With cost containment Health and LTC expenditure with and without cost FRANCE GERMANY ITALY SPAIN UNITED EU-15 USA containment (% of 2005 and 2050 GDP) KINGDOM AVERAGE14%12% 2.2%10% 2.0% 2.8% 2.6% 1.8% 1.9% 2.1% 1.0%8% 1.1% 1.1% 1.3% 0.9% 0.6%6% 0.2% 9.6% 8.7%4% 7.8% 7.9% 7.8% 7.9% 7.8% 7.9% 7.0% 6.0% 5.5% 6.1% 5.9% 6.3%2%0% 2005 2050 2005 2050 2005 2050 2005 2050 2005 2050 2005 2050 2005 2050 Health expenditure (excluding LTC) Expenditure for long-term care Without cost containment UNITED EU-15 FRANCE GERMANY ITALY SPAIN USA KINGDOM AVERAGE14% 2.9%12% 2.8% 3.5% 3.0% 3.4% 2.7% 2.6%10%8% 1.0% 1.1% 1.1% 0.9% 0.6% 1.3%6% 11.4% 0.2% 10.6% 9.7% 9.6% 9.7% 9.6% 9.7%4% 7.8% 7.0% 6.0% 5.5% 6.1% 5.9% 6.3%2%0% 2005 2050 2005 2050 2005 2050 2005 2050 2005 2050 2005 2050 2005 2050 Source: European House-Ambrosetti, based on OECD, “Projecting OECD Health and Long-Term Care Health expenditure (excluding LTC) Expenditure for long-term care Expenditure: What are the Main Drivers?”, 2006II.2.4 Towards a more efficient public-private equilibriumGiven the trends and projections described above, it is necessary to develop con-crete proposals that will preserve the principles on which the health system isfounded in Italy while helping it to cope with the consequences of the sweepingchanges under way in the country’s demographics, technological conditions andinstitutional framework. Accordingly, an important step would be to verify whethera new, more efficient balance can be struck between state intervention and themarket, so as to foster simultaneously both a lasting, sustainable reduction of pub-lic expenditure and further growth of firms and employment in the health care sec-tor. Health care now accounts for 5.8% of total employment in Italy compared with9.9% in the United States, where the sector has been a driver of investment andGDP growth. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 32 II. The insurance industry and its value for growth Striking the proper balance between public and private health coverage and creat- ing a new, supportive legislative and regulatory framework represent a political challenge that must be faced resolutely. Addressing the new needs requires exploring the role that private insurance can play in improving the protection of health both by channelling and organising the large flows of individual private expenditure and by flanking the public sector in financing the growth of health care spending. II.2.5 The possible role of private health insurance Governments often look to private health insurance as a possible solution for coping with the changes in the health care system and in society. From this standpoint, pri- vate health insurance can in fact serve multiple functions by: – helping to finance health care spending; – augmenting the capacity of the social welfare and assistance system; – providing incentives for more efficient health care. In short, private health insurance can contribute decisively to guaranteeing that each individual has effective, efficient social and health assistance and to improving the management of the health care system as a whole. The development of a market in private health insurance depends on government’s evaluation and approach to the function of the private sector. The role of private health insurance in the public health system can be of three kinds, depending on the government’s approach: – duplicate: the services are the same as those offered by the public system, but they are supplied by different providers: – complementary: specialised services are offered and the private sector can make up for the shortcomings of public facilities; – supplementary: private insurance covers specialised, low-demand benefits and services not provided by public health care. In the face of the projected changes and likely shortcomings in the quality of publicly- provided services and in the system for transferring services, for the State to continue to guarantee health coverage to all strata of the population it will be necessary to introduce a mixed, public-private system. In this context, employers could play a very important role in promoting private health plans. And, in fact, in the OECD countries with the highest levels of private coverage employers provide a large portion of private health insurance policies. This practice, which can be instituted through collective bargaining, makes sure that the availability of health care insurance is not restricted to high-income indi- viduals only. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 33 II. The insurance industry and its value for growthII.3 The insurance industry, small and medium-sized enterprises and the financial markets: new opportunities for value creationII.3.1 The evolution of the role of small and medium-sized enterprises in the Italian and European economyThe fabric of small and medium-sized enterprises (SMEs) is vital for the growth anddevelopment of the European economy, constituting its backbone. According to recentEurostat estimates, the European Union counts some 20 million SMEs, which alsorepresent Europe’s most important reservoir of employment.FIGURE II.14Composition of firms in selected EU countries (2000)% of all firms Belgium Denmark Germany Spain France Italy Netherlands Austria Poland FinlandMicro 92.1% 79.7% 81.4% 93.0% 92.1% 94.9% 91.3% 83.2% 93.0% 90.2%Small 6.7% 16.4% 15.5% 6.2% 6.7% 4.5% 7.3% 14.2% 5.9% 8.1%Medium-sized 1.0% 3.2% 2.6% 0.7% 1.1% 0.5% 1.1% 2.2% 1.0% 1.5%Large 0.2% 0.7% 0.5% 0.1% 0.2% 0.1% 0.3% 0.4% 0.1% 0.2%TOTAL 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Source: European House-Ambrosetti, based on Eurostat dataThe EU country with the highest percentage of micro-firms is Italy, where theyaccount for 94.9% of the total. Fully 93.7% of Italian firms have annual sales revenuesof less than €1 million. NUMBER OF FIRMS BY ANNUAL SALES FIGURE II.15 Workers and firms by annual sales, 2004 No. of firms Up to 1 million 4,008,587 50+million 1-50 million 264,421 18% Up to 1 million 50+ million 4,867 49% TOTAL 4,277,875 1-50 million 50+million 6.2% 0.1% 1-50 million 33% No. of workers Up to 1 million 8,196,693 1-50 million 5,373,659 50+ million 2,891,408 TOTAL 16,461,760 Up to 1 million 93,7% Source: European House-Ambrosetti, based on Istat’s WORKERS OF FIRMS CLASSED BY ANNUAL SALES Archivio Statistico delle Imprese Attive, October 2006 THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 34 II. The insurance industry and its value for growth The growth of the Italian economy and, more in general, of the European economy depends largely on the ability of SMEs to realise their potential. The insurance industry can play an important role for the growth of firms and Italy as a productive system. In particular, it can provide greater solidity to Italian enterprises, increasing their competitiveness and encouraging them to take risks and go for growth. II.3.2 Interaction between SMEs and the insurance industry in Italy Italian firms do not yet enjoy optimal insurance coverage, especially by international standards. FIGURE II.16 0.60% Corporate sector insurance premiums: ratio to GDP 0.50% 0.50% 0.43% 0.40% 0.34% 0.30% 0.30% 0.27% 0.23% 0.20% 0.17% 0.15% 0.10% 0.08% 0.06% N.d. N.d. 0.00% Property Accident and health TransportSource: European House-Ambrosetti, based on ANIA, ANIA Trends, II, Special issue, 17 November 2006 Italy Germany France Great Britain Two recent surveys demonstrate this in terms of the number of firms with insurance and, perhaps more significantly, the amount and type of coverage. Even more relevant is the fact that the propensity to take out insurance is lowest among smaller firms, precisely those that are most exposed to risk. While the low level of insurance cover cannot be traced with certainty to the SME- based structure of Italian business, there is no doubt that small and medium-sized enterprises are more vulnerable than others to adverse events, essentially because of their scant capital resources and limited access to the financial markets. The 25th Capitalia survey of SMEs, conducted in 2006 (in cooperation with ANIA), shows that over 80% of firms have at least one type of non-life policy.15 However, the proportion carrying insurance decreases with firm size. 15 The survey, performed by Databank S.p.A. on behalf of Capitalia’s research department, excludes firms with fewer than 10 workers and those operating in the business sector. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 35 II. The insurance industry and its value for growth100% FIGURE II.17 95% average Percentage of firms insured in Italy in the property sector, 90% 88.1% 2005 85% 80% 97.0% 98.4% 75% 86.6% 70% 65% 60% Source: European House-Ambrosetti, based on 11-50 workers 51-250 workers 251-500 workers Capitalia dataIn the property sector the average SME spent €24,000 on insurance premiums, anamount equal to 0.27% of sales revenues.In particular, the survey found that as firm size decreases:– the incidence of insurance coverage in relation to sales increases: firms with fewer than 50 workers spend 0.27% of sales revenues on premiums, compared with 0.20% for companies with 250 or more workers;16– the degree of insurance cover, gauged by the ratio of capital insured to assets, decreases: the ratio averages 62.5%, ranging from 52.5% for firms with fewer than 50 workers to 78.1% for the largest firms.Possible explanations for these findings are that:1. the larger firms are more able to evaluate risk and thus in a better position to decide which risks to cover with their own capital and which ones to insure (e.g. opting for higher deductibles), and are less risky to boot since they have more effective prevention measures in place;2. the unit price of insurance coverage is higher for smaller firms, in part because insurance business (risk evaluation, analysis and policy underwriting) has over- head costs and hence scale economies.In the sample, 72.5% of firms have liability insurance (excluding auto insurance). Heretoo the incidence of coverage is appreciably lower among the smaller companies:there is a coverage gap of nearly 30 percentage points between firms with fewer than50 workers and those with between 50 and 250. The average general liability insur-ance premium is nearly €7,000.According to a recent survey conducted by the Lombardy Association of Industry(Assolombarda), not only is the amount of expenditure by SMEs for insurance relativelylow but it also varies considerably by class of insurance.17 Specifically, business continuityinsurance is little used and the same is true of liability insurance (in particular for directors’liability). The same survey also reports that Italian businesses would like to have insuranceproducts providing more complete coverage and more suited to their needs. 16 The outlay per firm rises from €15,000 for businesses with between 11 and 50 workers to €62,000for those with between 50 and 250 workers, and to €210,000 for firms with between 251 and 500 workers. 17 Results of the Assolombarda questionnaire, “La gestione del rischio in azienda”, presented on 17 No-vember 2006. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 36 II. The insurance industry and its value for growth There is no doubt that insurance is a necessary instrument to cope with a variegated series of risks that can affect business activity, and so it is worth underscoring the importance of promoting a greater diffusion of insurance coverage among SMEs in Italy. The taxation of premiums is generally higher in Italy than in other European countries, which may help explain the lower incidence of insurance coverage. For example, the tax rate on liability insurance premiums is 22.15% in Italy, compared with 16% in Ger- many, 9% in France and 5% in the United Kingdom. Against this background, concrete steps are called for to improve the relationship between the insurance industry and businesses, in support of the growth and devel- opment of Italy’s entrepreneurial fabric.FIGURE II.18Percentage of firms insured against different types of risk - Assolombarda sample PROPERTY DAMAGE THIRD PARTY LIABILITY ’ 95.7% Fire/explosion 92.7% Third parties Weather/Natural 81.5% events Employees 90.2% Theft and robbery 78.7% Transport 57.5% Products/Services 80.2%Social and political events/ 56.3% Terrorism Directors and auditors 41.3% Business interruption 49.4% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% ACCIDENT AND HEALTH MOTOR Death/Permanent Fire/theft/collision 79.5% disability of management 76.8% personnel Legal expenses 55.3% Death/Permanent 63.4% disability of employees Credit 15.6% Medical expenses 37.7% Suretyship 16.4% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%Source: European House-Ambrosetti, based on Assolombarda questionnaire data, 2006 THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 37 II. The insurance industry and its value for growthII.3.3 SMEs, the banking system and access to creditOn the whole, Italian firms are more heavily indebted than businesses in the othermain European countries. ITALY SPAIN FIGURE II.19 Current composition of liabilities of SMEs in selected EU 31.6% 30.7% 32.8% 44.0% 47.6% 43.3% countries 18 68.4% 69.3% 67.2% 56.0% 52.4% 56.7% Small Mid-sized Large Small Mid-sized Large FRANCE GERMANY 26.3% 34.5% 41.2% 40.4% 38.8% 32.8% 73.3% 65.5% 58.8% 59.6% 61.2% 55.6% Source: European House-Ambrosetti, based on Small Mid-sized Large Small Mid-sized Large Prometeia and Bach data, 2007 Debt Capital and reservesWith the introduction of Basel 2, access to credit and its cost will be correlated moreclosely with the borrower’s risk profile. In this context it is necessary to investigate therelation between insurance coverage, credit risk and credit cost and determinewhether insured companies have lower probability of default or loss given default.This is no easy matter, for such an inquiry demands highly detailed data and long timeseries.It has been found, in any case, that Italian SMEs regard insurance policies as a validtool for strengthening their capital position in view of the changes introduced by Basle2.19 However, the same source reveals a lack of close interaction in Italy between thebanking sector, the insurance industry and SMEs, in contrast with the situation inother European countries.20 A Capitalia survey underscores some factors that distin-guish relations between SMEs, insurance companies and banks: for one thing, only asmall percentage of firms (36%) inform their banks of their own insurance coverage;for another, the firms that do inform their banks tend to be larger companies with ahigher degree of insurance cover (informing their bank may be a way to signal thatthey are less risky customers). 18 The sample considers firms with annual sales of less than €7 million “small” and those with salesof between €7 million and €40 million “mid-sized. 19 Results of the Assolombarda questionnaire, “La gestione del rischio in azienda”, presented on 17November 2006. 20 The survey finds that banks have played an important role in distributing insurance products to firms,notably in the case of credit insurance. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 38 II. The insurance industry and its value for growth II.3.4 Evolution of the role of the insurance industry in the financial mar- kets Insurance companies are among the leading institutional investors on the financial markets. In Europe, the value of the industry’s investments more than doubled in the ten years 1995-2005, rising from €2,357 billion to €5,981 billion, and today it exceeds 50% of the European Union’s GDP. Insurance companies thus are major players, making available to governments and businesses a huge volume of capital that can be used to promote growth and innova- tion and at the same time contributing to the development of the primary and second- ary markets in securities. FIGURE II.20 6,000 European insurance industry’s investments by sector (billions of euros) 5,000 4,000 3,000 2,000 1,000Source: European House-Ambrosetti, based on CEA dataand European Commission, Financial Integration Monitor 0 2006 1995 1998 2001 2004 2005 Non-life sector Life sector Total Investments financed by pension funds have also expanded vigorously in the recent past and can be expected to continue to grow in the future. FIGURE II.21 80% Pension funds’ investments as a % of GDP, 2001-2004 72.5% 66.5% 70% 65.1% 65.1% 60% 50% 40% 30% 20% Source: European House-Ambrosetti, based on OECD, 10% 5.8% 5.7% 9.0% 9.0% 6.6% 7.0% 7.0% 3.9% Global Pension Statistics, 2005 3.3% 3.4% 3.8% 3.8% 2.3% 2.4% 2.6% 2.6% Note: the OECD counts all public and private pension 0% funds that are privately financed UNITED KINGDOM SPAIN FRANCE GERMANY ITALY 2001 2002 2003 2004 THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 39 II. The insurance industry and its value for growthIn general, insurance companies in Europe invest mainly in bonds and shares: 66% ofEuropean insurance companies’ assets, excluding reserves for unit-linked policies, isinvested in debt securities and 24% in shares and other equity.In Italy too insurance companies are among the main institutional investors, with totalassets of €553 billion in 2006, of which €487 billion covering technical reserves, i.e.committed vis-à-vis policyholders.FIGURE II.22Insurance industry’s investment portfolio in Italy, Germany, the United Kingdom, France and Spain (2004) ITALY GERMANY Other investments 0.3% Real estate Other investments Real estate Affiliated firms Bank deposits 1.9% 2.2% 34,.0% 1.2% Loans, including and equity interests mortgage loans 9.3% Affiliated firms 0.4% and equity interests Shares and other 11.7% variable-yield securities and investment funds 5.4% Shares and other Loans, including variable-yield securities Bonds and mortgage loans and investment funds other fixed-yield 50.7% 23.1% Bonds and securities other fixed-yield 49.7% securities 10.2% UNITED KINGDOM FRANCE Bank deposits Other investments Other investments 3.4% Real estate Bank deposits 5.8% 0.7% Loans, including 6.0% 1.4% Real estate mortgage loans Loans, including 4.2% 1.3% mortgage loans 0.9% Shares and other variable-yield securities Bonds and and investment funds other fixed-yield 24.3% securities 68.6% Bonds and Shares and other other fixed-yield variable-yield securities securities and investment funds 38.4% 45.0% SPAIN Other investments Affiliated firms Bank deposits 14.3% and equity interests 6.6% Real estate 3.7% 3.6% Loans, including mortgage loans Shares and other 1.6% variable-yield securities and investment funds 6.5% Bonds and other fixed-yield securitiesSource: European House-Ambrosetti, based on CEA data 63.8% THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 40 II. The insurance industry and its value for growth In particular, at the end of 2006 life insurance reserves represented 11% of Italian households’ total financial savings, compared with 9% for units of Italian and foreign investment funds and less than 2% for pension funds. Insurance companies and, all the more, pension funds have large scope for growth on the financial markets in Italy compared with other European countries. A breakdown of the financial portfolio of insurance companies and pension funds in Italy can be derived from the financial accounts prepared by the Bank of Italy (Figure II.23). Currently, a substantial portion of the investments of Italian insur- ance companies and pension funds is in Italian and foreign government securities (38.4%) and bank liabilities and cash (18.5%). The percentage invested in shares (21.0%, of which more than two thirds domestic and about one third listed on the Milan stock exchange) and that in investment fund units (13.3%) are not far dif- ferent from the figures in the other main countries of continental Europe. The share invested in corporate bonds is limited (3.0%), as is that in local government bonds (0.4%). FIGURE II.23Financial portfolio of the Italian insurance industry and pension funds (2006) ITALY Cash and bank accounts Other Investment fund 8.7% 5.4% units 13.3% Italian government securities Foreign 25.4% shares 6.8% Domestic Local authority shares securities 14.2% 0.4% Italian corporate Italian bank Foreign government bondsSource: European House-Ambrosetti, based on Bank of bonds securities 3.0% Italy, Financial Accounts 9.8% 13.0% The size of the portfolio of assets they manage indicates that insurance companies in Italy have an important role to play for the development of the financial system. In particular they could: – assist the stock exchange listing of smaller firms, an especially important factor for Italy’s SMEs; – stimulate competition among financial market actors in essential fields, such as the collection of orders, securities trading and placement and financial market research, improving the sector’s competitiveness and benefiting investors; – make the financial system more open to innovation, creating new and enhanced possibilities for investment. Insurance companies and the world of industry must therefore begin to create syner- gies for the development of a modern and competitive financial market able to facili- tate fund-raising by companies and offer a wide range of investment opportunities. In this light, the insurance industry regards with favour the steps taken by the European THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 41 II. The insurance industry and its value for growthCommission to eliminate the obstacles to the development of a single market in finan-cial services (Solvency II).II.3.5 Constraints and incentives of the current prudential rules in Italy and Europe: the Solvency II projectIn Italy the competent authorities have recently signalled what appears to be a signifi-cant opening to the prospect of facilitating the operations of insurance companies inthe financial markets. ISVAP, the supervisory authority for the insurance industry,recently modified the quantitative and qualitative limits for some categories of invest-ment covering the technical reserves and introduced a new category of asset – called“alternative investments” – that includes investment in non-harmonised open-endfunds, funds reserved to qualified investors and hedge funds.At European level the Solvency II project is intended to define a prudential regime,including capital requirements, more closely calibrated to the actual risks to whichindividual companies are exposed and able to provide incentives for improved riskmeasurement and management. Solvency II is intended to reconcile the need to fullyprotect policyholders with the need to promote the competitiveness of Europeaninsurance companies.21 The new regime should also strengthen the role of insurerson the financial markets, encouraging and rewarding investment approaches that areconsistent with insurers’ typically long-term commitments to the insured.II.4 Natural disasters and terrorism: the key role of public-private partnershipII.4.1 Natural disasters and terrorist attacksNatural disasters are events caused by particular climate and/or geological conditionsthat cause damage on a major scale. Studies by supranational organisations show thatthe number, destructiveness and economic impact of natural disasters has increasedin recent years.These events are traceable to the effects of global warming and their effects are mag-nified by the growth of high-population-density areas, whose inhabitants are exposedto immediate loss and indirect consequences in the future.Numerous experts and scientific studies commissioned by institutional bodies argueforcefully that climate change is a reality that can have enormous effects on the life ofthe world’s population and the global economy in the years ahead.According to UN Secretary-General Ban Ki-moon, “The danger posed by war to allhumanity and to our planet is at least matched by climate crisis and global warning”.Unfortunately, Mr Ban adds, “my generation has been somewhat careless” about thefate of our planet. 21 CEA, Annual Report 2006-2007. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 42 II. The insurance industry and its value for growth Though the data are not uniform and dissenting voices are to be heard, the consensus is that the situation is at least serious and possibly alarming. NASA has found that the temperature of the Earth has risen by 0.2° C a decade in the last thirty years and that between 2000 and 2005 CO2 emissions increased by 3.2%, four times the speed of the previous ten years. In turn, the International Panel on Climate Change warns that by 2080 the number of people whose lives will be at risk for want of water could reach 3 billion. The IPCC also projects that hydroelectric power generation in the Mediter- ranean areas could fall by between 20% and 50% by 2070, owing mainly to a pro- jected 80% decline in the volume of flow of the rivers of southern Europe; that tem- peratures in the same areas will rise by as much as 5° C, while rainfall will diminish by 30%-40%; that by 2100 Italy will no longer have any rivers; and that the Alps could lose up to 60% of their animal and plant species because of climate change. Around the world the number of natural disasters has risen significantly in the past decades, with growing consequences. A study by the Emergency Events Database shows that the damage toll of natural disasters has risen significantly in the last 20 years,22 while one by Munich Re projects that the annual cost of natural catastrophes will reach $300 billion by 2050.23 FIGURE II.24 Billions of dollars Natural catastrophes in the world, 1970-2006 250 160 200 120 150 80 100 40 50 0 0Source: European House-Ambrosetti, based on Emer- 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 gency Events Database (EM-DAT) Costs Number of catastrophes (right-hand scale) Within Italy there are areas with a high likelihood of being hit by natural disasters. The most probable events, in given parts of Italy, are forest fires, floods, landslides, earth- quakes, droughts and volcanic eruptions. Italy is vulnerable to serious damage. According to a joint study by the Italian Ministry for the Environment and the National Research Council, 45.3% of Italy’s municipalities are located in zones subject to catas- trophes caused by meteorological events, such as floods, landslides, mudslides and droughts, while 61.2% have suffered damage from earthquakes in the last 1,000 years. Before the 2001 attack on the World Trade Center in New York, terrorism was preva- 22 Emergency Events Database (EM-DAT), “Thirty years of natural disasters 1974-2003: the numbers”. 23 Munich Re Group, “Natural Catastrophes 2006. Analyses, assessments, positions”. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 43 II. The insurance industry and its value for growthlently a national, not a global phenomenon. Individual countries each faced a specifictype of terrorism, rooted in political or territorial demands and for the most part self-contained, without links to foreign groups. Today instead terrorism has assumed aninternational dimension; the activity of terrorist groups formed in different countriesposes a threat to a multitude of nations.This type of terrorism is characterised by its determination to cause the greatest num-ber of victims among the citizens of the Western countries that it brands as “enemies”and maximum damage to their economic and financial systems, so as to underminetheir stability. According to a University of Southern California study of internationalterrorist attacks and the damage they have caused in the last 37 years, the number ofattacks has diminished in the past decade and a half while the number of people killedand wounded has soared in the last decade.No. of victims No. of attacks FIGURE II.258,000 700 Terrorist attacks in the world, 1968-20037,000 6006,000 5005,000 4004,000 3003,000 2002,0001,000 100 0 0 Source: European House-Ambrosetti, based on Iterate 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Database, University of South California Victims AttacksGovernments are hard put to come up with the budgetary resources necessary tocover the increasing costs of natural catastrophes and terrorist attacks. Accordingly,they have taken a shared coverage approach, directly involving the private insuranceindustry through private-public partnership in order to redistribute and mitigate thesocial and economic risks caused by catastrophic events, reducing the financial expo-sure of the public sector and utilising the industry’s expertise to make the wholeprocess of insuring against catastrophic risks more efficient and effective.II.4.2 The Italian system of insuring against large-scale damageIn Italy, the State is de facto assigned the role of distributing economic and logistical aid tothe areas hit by a catastrophe and to the victims. The centrality of the State has essentiallyobligated the public sector to cover the large-scale damage from catastrophic events.In fact, the State is responsible for managing payments and evaluating damage andlosses, through a bureaucratic procedure that begins with the official declaration of emer-gency and ends with redistribution of resources, through regional and municipal chan-nels, to applicants for compensation. The process is time-consuming, ineffective andcumbersome, and the system now in place is not sustainable in the face of the expected THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 44 II. The insurance industry and its value for growth increase in the frequency of catastrophes. There are at least two good reasons for revis- ing the current model: the State’s large financial exposure and the forecast increase in the frequency and intensity of natural disasters in the future. The OECD estimates that the Italian State has made compensation payments of €35 billion in the last 10 years.24 Data from the Italian Department of Civil Protection provide a disaggregated picture of the collective and private costs of natural calamities. Between 1997 and 2003 natural disasters caused an estimated €32 billion of damage, due to hydro-geological and seis- mic events in about equal portions. The costs averaged €4.6 billion per year, albeit, unsurprisingly, with pronounced variability. The year with the largest amount of damage was 1997, when the bill came to more than €11 billion owing to the earthquakes that struck in the Marche and Umbria regions; the low was recorded in 2001 (€374 million). The impact of natural calamities on housing differs according to the type of event and the place where it occurs. Overall, damage to houses makes up about 30% of the total. The percentage rises to 56% in the case of earthquakes, while it is limited to 6.5% for floods and landslides. The annual damage to housing averaged €1.4 billion, with a high of €6.4 billion in 1997 and a low of €71 million in 2001. FIGURE II.26 DAMAGE DUE TO NATURAL DISASTERS (MILLIONS OF EUROS) Damage due to natural disasters in Italy, 1997-2003 TOTAL DAMAGE DAMAGE TO HOUSING 1997 11,298 6,357 Hydro-geological events 382 17 Seismic events 10,916 6,340 1998 1,653 811 Hydro-geological events 865 75 Seismic events 788 736 1999 631 45 Hydro-geological events 628 45 Seismic events 3 0 2000 8,879 760 Hydro-geological events 8,717 684 Seismic events 168 76 2001 374 71 Hydro-geological events 318 43 Seismic events 56 28 2002 6,044 1,340 Hydro-geological events 2,998 101 Seismic events 3,046 1,239 2003 3,147 231 Hydro-geological events 3,002 132 Seismic events 145 99 TOTAL 32,026 9,615 Hydro-geological events 16,964 1,097Source: European House-Ambrosetti, based on data from Seismic events 15,062 8,515 Department of Civil Protection 24 OECD, “Stocktaking of different approaches to financial management of large-scale disasters in se- lected OECD and non-member countries”, January 2006. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 45 III. Proposals to actuate the potential of the insurance industry SECTION III PROPOSALS TO ACTUATE THE POTENTIAL OF THE INSURANCE INDUSTRYAs we have seen, the insurance industry can play a major role in Italy and in Europe.The recommendations that follow are general and so apply, with appropriate adjust-ment, to other European countries as well. Essentially, these are proposals to submitto the Community institutions in four main areas:– fostering the development of supplementary retirement schemes at European level, in particular speeding up the adoption of the directives needed for greater pension portability;– enhancing the competitiveness of small and medium-sized enterprises through greater access to credit; to this end banks, firms and insurance companies must consider ways of making sure that adequate insurance coverage results in a better credit rating;– strengthening the insurance sector as an institutional investor; promoting, with the adoption of Solvency II, the introduction at European level of a harmonised system in which capital requirements are strictly a function of risk profiles but also of the time frame in which the insurance sector operates;– creating a public-private partnership to handle risks of catastrophe and terrorism at European level; promoting a risk sharing model for more effective coverage and reduced costs, thanks to better distribution of risks between countries.These recommendations are set forth in greater detail in the broad, thematic analysisthat follows, which also offers a series of considerations on the national and suprana-tional relevance of the issues.III.1 The pension systemCoping with inevitable demographic and social changes, taking up the challenge ofbuilding an effective multi-pillar pension system, is one way in which the State canensure decent living standards for the aged. The reforms of the public pension systemthat have been undertaken will lower the income replacement rate (the ratio of work-ers’ public pensions to their final earnings). However, at least in some countries, thesereforms have not been accompanied by policies to development supplementary retire-ment provision. Our recommendations accordingly focus essentially on private pen-sion plans.III.1.1 Recommendations for European policy-makers CONSOLIDATE, STRENGTHEN AND CAPITALISE ON THE POTENTIAL OF THE MULTI-PILLAR PENSION SYSTEM AS A STRATEGIC INSTRUMENT FOR NATIONAL DEVELOPMENT THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 46 III. Proposals to actuate the potential of the insurance industry – Message for Europe: Facilitate job creation and a prolonged working life and speed up the issue of a directive on portability of supplementary pension rights Consistent with the Lisbon Strategy, the labour market participation rate needs to be raised, especially for women, and working life needs to be lengthened, among other things through the development of flexible forms of work. To facilitate mobil- ity of workers within the European Union effective portability of pensions between member states must be guaranteed.1 – A massive campaign to inform the public about the changes under way in the pension system and to promote awareness and financial education There are at least two reasons for the underdevelopment of supplementary pen- sion plans: lack of information and preparation, especially among young people, and poor financial education, which prevents citizens from making informed choices on retirement. The State must accordingly do two things: • Provide clear, comprehensible information on individuals’ pension posi- tions and the amount of additional retirement saving required to meet their needs A greater effort is needed today to provide all working people, on a personal, individ- ual basis, with adequate knowledge of their retirement position. • Undertake a programme of financial literacy, education and information However, individuals’ awareness of their own public pension position must be accompanied by comparable awareness of the various options offered by the sup- plementary pension market. So it is necessary to begin a programme of financial literacy, education and information for citizens. – Create scope for additional private retirement saving In all national pension systems with compulsory contributions, like Italy’s, private retirement saving is of modest dimensions. From this standpoint, it is certainly rea- sonable to ask whether Italy’s 33% social security tax rate, augmented by the 6.91% severance pay allocation, does not exhaust the scope for additional contri- butions to private pension plans. As central bank governor Mario Draghi has recently argued, a possible solution would be – without prejudice to the equilibrium of the public finances – to divert part of public contributions to the private sector.2 1 That is, the possibility of acquiring (including for shorter-term jobs at the beginning of one’s career) and maintaining pension rights in the event of occupational mobility (either retaining the previous job’s pen- sion scheme or transferring the rights to a new system). 2 “Without prejudice to the stability of the public finances, and given that overall contributions to the public pension system equal 33 per cent of wages, by far the highest rate among the major European countries, thought should also be given to permitting individual employees to make voluntary allocations of a limited portion of their public pension contributions to supplementary pension schemes.” Banca d’Italia, Annual Report on 2006. “The Governor’s Concluding Remarks” to the Shareholders Meeting, 31 May 2007. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 47 III. Proposals to actuate the potential of the insurance industry– Incentives for European harmonisation of taxation, to facilitate the shift from short-term to long-term financial saving Though Italy’s ETT method3 is a first step towards providing adequate incen- tives for private pension plans, going over to the EET schema4 prevalent in the rest of Europe would be still more effective. More generally, financial saving policies to encourage long-term against speculative, short-term investment are sensible.– Lengthen the maturity of the public debt and encourage financial innovation. On the supply side, more issues of long-term government securities (30 years and up) and inflation-indexed paper could stabilise the cost of debt service; and on the demand side it would sustain the development of the private pension market. Fur- ther, where State pension liabilities entail substantial longevity risk, consideration should be given to developing a longevity bond market, to redistribute at least part of the risk to the market and extend the range of instruments available to institu- tional investors. A market in longevity bonds could also increase private pension fund yields.III.1.2 Value creation impact simulationsA simple model can be used to estimate the positive contribution of private pensionplans to sustaining Italian consumption in 2050 on the assumption that they becomean integral part of the overall Italian pension system. The estimate for the positivecontribution of supplementary retirement provisions can also be read another way:namely as the presumed cost to the State if policies to stimulate the development ofsupplementary pensions are not undertaken.To estimate the amount of resources that supplementary retirement plans would makeavailable, one must recall that over the years the income replacement rate offered bythe first, public pillar will decline, while that of the second, private pillar will increase.The estimates given in the Labour Ministry’s 2002 report on national pension strategy(Rapporto di strategia nazionale sulle pensioni) indicate that a 60-year-old private-sec-tor worker with 35 years of contributions retiring in 2030 will have a pension equal to64% of his last pay packet. This overall replacement rate will be made up mostly ofpublic entitlement (49.6%) and partly (14.4%) of private supplementary benefits,which are estimated assuming the allocation of the entire severance pay to the privatescheme plus additional contributions of 2.3% of earnings. Ten years later, the overallreplacement rate is projected at 65.2% (48.5% public and 16.7% private). In 2050 thepublic pension replacement rate will be 48.1% and supplementary schemes will pro-vide 16.7%, giving an overall figure of 64.8%. 3 Exemption-taxation-taxation: contributions are tax-exempt but the pension fund’s capital gains andbenefit payments are taxable. 4 Exemption-exemption-taxation: i.e. capital gains too are tax-exempt on an annual basis. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 48 III. Proposals to actuate the potential of the insurance industry FIGURE III.1 70.0% 65.4% 64.1% 65.2% 64.8%Income replacement rates of public and supplementary pension provision by year of retirement. Private-sector 60.0% 56.0% employee with 35 years of contributions 49.6% 48.5% 50.0% 48.1% 40.0% 30.0% 20.0% 16.7% 16.7% 14.5% 9.4% 10.0% Source: European House-Ambrosetti, based on 2020 2030 2040 2050 “Rapporto di strategia nazionale sulle Pensioni”, Ministero del Lavoro e delle Politiche Sociali, 2002 Public Supplementary private Total Taking all private-sector pensions in being in 2050, slightly over four-fifths of total pension income will come from the public system and one-fifth from the private schemes. As public pension expenditure will come to 14% of GDP in that year, according to State Accounting Office projections made at the end of 2006, it can be calculated that the creation of a solid “multi-pillar” pension system could produce an annual flow of supplementary retirement benefits equal to 3.5% of GDP. Insurance companies will play a major role in asset management for the supplemen- tary pension schemes (today, they manage some 40% of these assets), and an even more important role in the disbursement of the benefits.5 It must be underscored that an indispensable assumption of this simulation is that the entire flow of severance pay allocations goes to supplementary private pension schemes, and that this in turn is supplemented by an additional contribution equal to 2.3 per cent of earnings paid by employer and employees. III.2 Health and long-term care III.2.1 Recommendations for European policy-makers DEVELOP INTEGRATED HEALTH/WELFARE PROVISION THROUGH PUBLIC-PRIVATE PART- NERSHIP IN ORDER TO MAINTAIN UNIVERSAL PUBLIC HEALTH COVERAGE AND MAKE ITALY A “POLE OF EXCELLENCE”, COMPETITIVE AND ATTRACTIVE INTERNATIONALLY 5 The natural, typical benefit is the annuity. The law discourages the payment of supplementary pension benefits in the form of a lump sum and prohibits the one-time payment of more than 50% of the entitlement accrued. However, to avoid the payment of very small annuities, with the attendant costs, the law does per- mit the payment of the entire entitlement accrued as a lump sum when the income stream from 70 per cent of the accrued assets would be less than half the old age poverty benefit. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 49 III. Proposals to actuate the potential of the insurance industryCreate an appropriate legislative and regulatory framework based on clearly setessential assistance standards.For the proper functioning of public-private partnership, the regulatory frameworkneeds to be adapted, with an agreed definition of essential assistance standards (atnational and at regional level6) to determine exactly what health care services and ben-efits are to be guaranteed by the public system.Incentives for private health insurance to cover health care services supplementaryto the essential standards, in particular dentistry and long-term careIt is important to sustain the spread of special insurance for long term care and den-tal work. These items weigh heavily on household budgets and are paid for almostentirely out-of-pocket by patients. Collective bargaining can play a role here, as isalready happening for long-term care in the insurance industry. The purchase ofinsurance in this area could be encouraged by tax incentives for households andemployers.Investment in specific firms/sectors permitting the formation of a set ofsocial/health/welfare services around the old person/patient and around the familymore generallyMore generally, a family-centred service economy needs to be created. Integratedhealth/welfare services need to be provided through public-private partnership to pro-tect the population’s health.Health awareness and responsibility campaignPeople, especially young people, are apparently not very sensitive to the theme ofhealth and preventive action. A joint public-private effort is thus needed to fosteramong young people a culture of health care and prevention and a sense of responsi-bility, encouraging them to think of their future.Bring health services into line with demand, both in quantity and in quality, actingin three areas:– redesigning the system of co-payments, diversifying them by type of care and graduating them according to the patient’s economic and health status, so as to encourage individual responsibility for spending and selection;– stimulating private in-hospital care by National Health Service doctors, which by overcoming the areas of inefficiency found in the past can permit full exploitation of the potential benefits for patients (freedom of choice of doctor, quality service, short waiting lists) and make it economic to take out ad hoc insurance; 6 The regions enjoy full autonomy in the provision of health care services. The essential standards ofassistance thus vary from region to region. Naturally, a decision is needed on how to produce a uniform def-inition of standards for the provision and management of health care at national level without underminingthe powers of the regions. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 50 III. Proposals to actuate the potential of the insurance industry – optimising the regulation and operation of health care funds, which not only per- mit effective risk pooling but also, when accompanied by tax incentives differenti- ated by income, channel health care spending in less regressive fashion than out- of-pocket expense. III.2.2 Value creation impact simulations Here too, a simple theoretical simulation can show the magnitude of the impact, in 2050, of a larger private insurance presence in support of the health care system, based on established European experience. The following data and assumptions are used. Italian public health care spending came to 6.6% of GDP in 2005, 6.0% for health spending strictly speaking and 0.6% for long-term care; households them- selves spent an amount equal to 1.9% of GDP, 1.8% for direct purchase of goods or services and 0.1% for insurance policies; health spending strictly speaking was thus distributed as follows: 76.4% public, 22.7% out-of-pocket and 0.9% private health insurance. Two scenarios are possible: the baseline scenario (current programmes projection) and public expenditure containment. According to the OECD, projecting a continuation of the trends of the last two decades, in 2050 public health expenditure will come to 13.2% of GDP (9.7% for health care proper and 3.5% for long-term care).7 Assuming that private health expenditure grows at the same rate, total health care spending will come to 16.3% of GDP.8 Under the expenditure-containment scenario, i.e. assuming unspecified policy action that succeeds in slowing public health care spending growth, public health care spending will be 10.7% of GDP in 2050 (7.9% for health care proper and 2.8% for long term care). We project private health insurance expenditure based on two assumptions: 1) overall health care spending is not reduced below the projected 16.3% of GDP; and 2) private spending is split evenly between out-of- pocket and insurance policies (broadly in line with the distribution now found in France and Germany, where active policies for supplementary private health care facil- ities have been undertaken). On this basis, private health insurance expenditure comes to 2.8% of GDP in 2050. FIGURE III.2 Distribution of health expenditure by item, 2005 and Public health Private health Private Private Health and 2050 GDP and LTC expenditure health out-of-pocket Year LTC expenditure (€bn) expenditure (% of GDP) insurance health and (% of GDP) (% of GDP) (% of GDP) LTC expenditure (% of GDP) 2005 1,417.24 8.5 6.6 1.9 0.1 1.8 2050 (baseline scenario) 2,715.51 16.3 13.2 3.1 0.2 2.9Source: European House-Ambrosetti, based on based on 2050 (containment OECD, “Projecting OECD Health and Long-Term Care scenario) 2,715.21 16.3 10.7 5.6 2.8 2.8 Expenditures: What are the Main Drivers?” 2007 7 European House-Ambrosetti, based on data from “Projecting OECD Health and Long Term Care Expenditures: What are the Main Drivers?”, 2007. 8 Ibid. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 51 III. Proposals to actuate the potential of the insurance industryComparing the two scenarios for 2050, we see that the expenditure containment sce-nario, with a greater incidence of private health insurance, could result in savings ofup to €68 billion in public health care expenditure by comparison with the baseline.This is a very substantial amount of resources that could be freed for allocation toother public policies. Total health care expenditure €442.6 billion FIGURE III.3 Possible impact: the baseline and cost-containment sce- 76.0 narios to 2050 78.7 5.5 76.0 358.4 - €67.8 billion 290.6 Source: European House-Ambrosetti, based on OECD, 2050 (baseline) 2050 (expenditure containment, increased “Projecting OECD Health and Long-Term Care Expendi- private health insurance) tures: What are the Main Drivers?” 2007 Public health expenditure Private health expenditure Out of pocketAt the same time, there is a reduction in households’ out-of-pocket spending of €2.7billion, and a corresponding strong increase in private health insurance (€70.6 bil-lion), which also means significant development of a private health care system(insurance, health care funds), with benefits for economic growth and jobs. In otherwords, though overall health care expenditure is the same in the two scenarios(€442.6 billion), there is very significant redistribution, with large savings on publicexpenditure. Together with the reduced incidence of public spending on GDP, the pub-lic expenditure containment scenario would also generate greater channelling ofexpenditures by the private sector. This would not only moderate the highly regressiveeffect of this type of expenditure but bring such additional benefits as spurring animprovement in the quality of services and boosting the effectiveness and efficiency ofthe entire system.III.3 SMEs and financial marketsIII.3.1 Recommendations for policy-makers in Italy and EuropeSMES PROMOTE INSURANCE FOR BUSINESSES AND STRENGTHEN RELATIONS BETWEEN BANKS AND INSURANCE COMPANIES TO SUPPORT GROWTH AND EXPANSION OF SMALL AND MEDIUM-SIZED ENTERPRISES AND ENHANCE THEIR INTERNATIONAL COMPETITIVENESS THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 52 III. Proposals to actuate the potential of the insurance industry Message for Europe: Launch a synergic effort by the banking and insurance indus- tries to set common standards that banks can apply in their rating systems, facili- tating credit access for SMEs. Consider the possibility of including insurance cover in the banks’ internal rating sys- tems under Basel 2. This will require a synergic effort to reach a shared notion of “adequate insurance cover,” which will encourage more widespread insurance of SMEs and greater awareness on the part of businessmen of the need for adequate protection. Map the new risks for firms and distribute more complete insurance instruments It is up to insurers and insurance brokers to grasp the emerging needs of firms and adapt their products accordingly. Convince SMEs of the need for professional risk management The insurance industry has to play an active role in fostering the SMEs’ awareness of the need to acquire adequate tools for measuring and managing the various kinds of risk. To put these recommendations into practice, we propose: Joint initiatives by the insurance sector and business associations to sensitise businessmen to the issue of insurance coverage. Insurance companies must inten- sify their relations with manufacturers’ associations, sensitising businessmen to the importance of adequate insurance cover. Reduce the tax rate on non-life insurance policies for businesses. Italy has among the highest tax rates on insurance policies in Europe. A reduction towards the EU average would make insurance less costly and encourage its more widespread use by firms. THE FINANCIAL MARKETS DESIGN AN ADEQUATE LEGISLATIVE/REGULATORY FRAMEWORK AND PROMOTE ACTIVE COOPERATION BETWEEN PUBLIC AND PRIVATE, IN ORDER TO UNLOCK THE POTENTIAL OF THE INSURANCE INDUSTRY FOR FINANCIAL MARKETS, IMPROVE FIRMS’ COMPETITIVE- NESS AND FOSTER THE GROWTH AND DEVELOPMENT OF THE COUNTRY (AND OF EUROPE) Message for Europe: Exploit the opportunity provided by Solvency II to develop the role of insurance companies as institutional investors. The Solvency II directive must strike the right balance between protection for the insured and not making insur- ance too costly. To increase European firms’ competitiveness, we must make sure that the new rules do not penalise investment in unlisted shares and markets and that they take due account of the time frame of insurance companies’ investments. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 53 III. Proposals to actuate the potential of the insurance industryDesign an ad hoc policy with medium to long-term objectives to increase the insur-ance industry’s support to innovative SMEs with high growth potential. As inFrance, thought could be given in Italy to tax measures to encourage the spread offinancial and insurance products for financing SMEs, especially unlisted ones.Develop adequate financial instruments to permit insurers to invest in improvingstrategic infrastructure. Italy’s various local authorities (municipalities, provinces,regions) need to develop new debt instruments to finance infrastructural investment(universities, roads, hospitals) that can be attractive to institutional investors with along time horizon.III.3.2 Value creation impact simulationsThe French insurance industry is steadily increasing its investment in SMEs, which asin Italy are the heart of the national manufacturing system. This suggests that the Ital-ian industry could play a comparable role. Let us describe the two main initiativesundertaken by the government and insurers.The finance act for 2005, in order to favour funding of SMEs, exempted the accruedreturns on some types of unit-linked products with duration of at least 8 years andinvolving investment in UCITS9 at least 30 per cent of whose assets consists inshares, 10% in investment in “risky” assets or innovation, and 5% in unlisted com-pany shares.Earlier, at the government’s initiative, the insurance industry pledged to step up invest-ment in SMEs with high growth potential, in particular unlisted ones and those listedon unregulated markets. In practice the industry decided to increase the share of itsinvestment portfolio allocated to SMEs by 0.6 percentage points, from 1.4% to2.0%).10Let us perform a simple theoretical simulation to see what might happen in Italy undersuch a policy. In 2006 Italian insurers had total assets of €553 billion, €487 billion inassets to cover technical reserves. Assuming that over the next three years 4% ofthese reserves is shifted to investment in corporate bonds and private equity fundsand half of this goes to SMEs, the Italian insurance industry would be in a position tofree an additional €9.7 billion for innovative, high-growth SMEs.More generally, if the French example were followed by many EU member states, itwould decisively boost the competitiveness of the continent’s firms.If suitable instruments for directing the insurance industry’s investment were devel-oped, it could also play a major role in modernising Italian infrastructure. In our view,this could be achieved by the issuance of bonds to finance infrastructural develop-ment by public bodies at various levels offering a guaranteed yield to the insurers. 9 Undertakings for Collective Investments in Transferable Securities. 10 Obviously, specific investment choices remain the responsibility of the individual insurance compa-ny. The investment went mainly to high-tech industries (electronics, telephone and communications, biolo-gy and chemicals) and high-growth sectors (restaurants, tourism). THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 54 III. Proposals to actuate the potential of the insurance industry FIGURE III.4Resources potentially invested to sustain SMEs by shift- Private equity fundsing 2 percentage points of the assets covering insurance +2% technical reserves in Italy Corporate bonds +2% €487 billion + €9.7 billion 96% Resources freed by insurance industries for innovative, Distribution of high-growth SMEs investment of technical reserves Source: European House-Ambrosetti Total technical reserves Considering the great success of such instruments with U.S. insurance companies, we have sought to quantify the additional resources the insurance industry could put at the country’s disposal without modifying the portfolio share of bonds. The exercise utilizes the data that follow. In 2006, 48.2% of Italian insurers’ financial portfolio was invested in government securities and private sector bonds. Local government bond issues in Italy came to €6.8 billion in 2006, and the outstanding stock at the end of the year was €35.7 billion, including €3 billion held by insurance companies and pen- sion funds.11 The funds raised by local bond issues are increasingly allocated to infra- structural investment and regional health care systems. The resources that could be freed if 5 per cent of the insurance companies’ bond port- folio were invested in local government bonds would thus come to €13.3 billion, made available for infrastructural investment. So it is clear that appropriate change to policies for long-term infrastructural finance would enable the insurance industry, with its vast resources for investment, to play an important role in boosting the country’s economic and infrastructural competitiveness. FIGURE III.5 €553 billion Investment in local bonds Resources potentially available to finance infrastructural +5%investment if 5 per cent of Italian insurers’ bond portfolio were reallocated to local government securities 48.2% +€13.3 billion 95% Resources made available by insurance industry for infrastructural Financial investment portfolio invested in bonds Source: European House-Ambrosetti Total technical reserves 11 Annual Report of the Bank of Italy for 2006. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 55 III. Proposals to actuate the potential of the insurance industryIII.4 Natural disasters and terrorismIII.4.1 Recommendations for European policy-makers FORGE A PARTNERSHIP BETWEEN PUBLIC AND PRIVATE SYSTEMS WITH THE AIM OF FOS- TERING PREVENTION AND ENSURING EFFECTIVE AND EFFICIENT COMPENSATION PAYMENTMessage for Europe: Promote the creation of an integrated system at Europeanlevel for handling large-scale damage. The issue of natural disasters and the dam-age caused is common to most European countries. The creation of a European risk-sharing model via a supranational system would increase the effectiveness of cover-age and reduce costs, thanks to broader distribution of risks between countries.Design an efficient risk coverage system, including by automatic extension of natu-ral disaster coverage in fire policies. The aim is to build a system which through pri-vate insurance provides an incentive for territorial protection, ensures that those suf-fering damage are guaranteed equal treatment, offers faster and more effectiveassessment of damages and settlement, and helps to reduce the cost to the State. Ourproposal is for the introduction of a mixed system in which the State gradually dimin-ishes its direct intervention in case of disaster to provide an incentive for individualinsurance, but protecting infrastructures, low-income proprietors and, at least in aninitial phase, certain parts of the national territory. The automatic extension of disastercoverage in fire insurance (so-called semi-compulsory disaster insurance) wouldenable the system to avoid anti-selection of risks and give it a critical mass of con-tracts among which the principle of mutuality would prevail.Promote the role of the State as insurer of last resort. The experience of other coun-tries shows that it is essential to define the State’s role as insurer of last resort pre-cisely. It should stand ready to intervene above a specified loss threshold that must beset in advance, taking account of the world insurance and reinsurance system. Fur-ther, the public re-insurer must not only have a State guarantee but must also haveadequate capital endowment, because the payments it makes must be rapid, under itscontracts with the insured.Incentives for risk prevention at territorial level. Italy is marked by high exposure tothe risk of natural disaster. To reduce this risk, there should be a system of incentivesfor prevention.III.4.2 Value creation impact simulationsTo calculate the effects of introducing a public-private partnership for the insurance ofnatural disasters, we refer only to the State expenditure allocated to compensating fordamage to private property, not to damage to infrastructure, which would continue tobe covered by the State alone. According to Italian Civil Protection and OECD data, theItalian central government paid an average of €3.75 billion a year on natural disasterrelief and compensation in the decade from 1996 through 2005. About half theamount went to rebuild public infrastructure, the other half to compensate citizens andfirms, according to estimates of the Swiss Re insurance company, consistent with THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 56 III. Proposals to actuate the potential of the insurance industry those of the Civil Protection Department. In our estimate we assume that payments over the next ten years will increase by 2.5% per year (less than the 4.8% rate recorded in 1996-200512) and that the State allocates €500 million a year to preven- tion incentives in high-risk areas. Finally, we assume that the State’s commitment as insurer of last resort does not weigh on the public finances. This is consistent with the French experience that uniform reinsurance throughout the national territory has shown its ability to maintain substantial balance between premiums and claim payments. If the current natural disaster coverage is maintained, i.e. if the State continues to be the sole agent liable, the expenditure in from 2012 through 2021 would amount to €53 billion.13 If instead public-private partnership were introduced in 2012 (with the State and private insurers covering 50% of the costs each), this would be cut to €26 billion for infrastructure reconstruction. In addition, there would be €5 billion for prevention expenditures. The total public cost under public-private partnership would in any case be reduced to €31 billion. This represents an overall public saving of €22 billion in ten years for natural disaster cover. FIGURE III.6 Public Italian public expenditure on disaster coverage, 2012- expenditure €53 billion2021: all-public and public-private partnership compared -€22 billion €5 billion €26 billionSource: European House-Ambrosetti, based on data from EM-DAT, Munich RE and Dipartimento della Protezione Civile 2012-2021 (all-public) 2012-2021 (public-private) Spending for natural disaster coverage Budget for risk mitigation 12 Munich Re, “Natural catastrophes 2006: Analyses, assessments, positions”, February 2007. 13 Calculations by European House-Ambrosetti. The amount results from applying for the future the average annual growth rate of Italian State spending on natural disaster relief and compensation (2.5%). Moreover, the figures for 1995-2005 have been calculated so that the average annual expenditure equals €3.75 billion, with an average annual growth rate of 4,8%. THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 06 Conclusion (57-60) 05-09-2007 19:00 Pagina 57 57 Conclusion: recommendations and impacts: an integrated vision CONCLUSION RECOMMENDATIONS AND IMPACTS: AN INTEGRATED VISION Our examination by specific areas (pensions, health care, SMEs and financial markets, natural disasters and terrorism) confirms the initial hypothesis concerning the impor- tant benefits that can flow from liberating the potential of the insurance industry to work in complementary, synergic fashion with the public sector (a win-win situation) to foster economic growth in Italy and in Europe. The figures below are designed to give the reader an overview, an integrated yet suffi- ciently detailed vision of the various phenomena examined. For each area, the figures give all the recommendations and guidelines for policy-makers in Italy and in Europe and the main qualitative and quantitative impacts found by our simulations and esti- mates. FIGURE 1 Recommendations and impacts: Pension system, health and long-term care IMPACTS AREA RECOMMENDATIONS GUIDELINES QUALITATIVE ECONOMIC ESTIMATE Facilitate job creation and a prolonged working life and speed up the issue of an EU directive on portability of supplementary pension rights Financial education for citizens, strengthening A massive campaign to inform the public of the changes awareness of pension position especially among Creation of a solid “multi-pillar” retirement CONSOLIDATE, STRENGTHEN AND under way in the pension system and to promote young people system could produce an annual flow of CAPITALISE ON THE POTENTIAL awareness and financial education supplementary private pension benefits PENSIONS OF THE MULTI-PILLAR PENSION Facilitate free movement of persons in Europe equal to 3.5% of GDP in 2050 SYSTEM AS A STRATEGIC Create scope for additional private retirement saving Provide more secure guarantees for the income of the INSTRUMENT FOR NATIONAL Insurance will play a major role in managing elderly and develop products better serving their needs DEVELOPMENT Incentives for European harmonisation of taxation, retirement savings and even more so to facilitate the shift from short-term to long-term Foster increased investment in the capital market and in disboursing benefits. financial saving promote economic growth Lengthen the maturity of the public debt and encourage financial innovation Create an appropriate legislative and regulatory framework based on clearly set essential assistance Development of a private health care system standards (insurance, health funds), with benefits for economic growth and jobs DEVELOP INTEGRATED Incentives for private health insurance to cover health HEALTH/WELFARE PROVISION care services not part of the essential standards, Provide a more complete and adequate range of THROUGH PUBLIC-PRIVATE in particular dentistry and long-term care services for new needs. Contribute to efficiency and quality of health services With a larger role for private health HEALTH AND LONG- PARTNERSHIP IN ORDER TO insurance, in 2050 a €68 bilon saving TERM CARE MAINTAIN UNIVERSAL PUBLIC Investment in specific firms/sectors permitting the creation of a constellation of social/health/welfare Reduce the inequality and regressiveness of in public expenditure could be obtained. HEALTH COVERAGE AND MAKE ITALY A “POLE OF EXCELLENCE”, services around the old person/patient and around out-of-pocket health spending; guarantee affordable COMPETITIVE AND ATTRACTIVE the family more generally coverage for long term care INTERNATIONALLY Health awareness and responsibility campaign Foster innovation and new technology in health care Bring health services into line with demand, both Improved health of the population in quantity and in quality Source: Calculations by European House-Ambrosetti THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 06 Conclusion (57-60) 05-09-2007 19:00 Pagina 58 58 Conclusion: recommendations and impacts: an integrated vision FIGURE 2 Recommendations and impacts: SMEs and financial markets IMPACTS AREA RECOMMENDATIONS GUIDELINES QUALITATIVE ECONOMIC ESTIMATE Launch a synergic effort by the banking and insurance industries to set common standards that banks can apply PROMOTE INSURANCE FOR in their rating systems, facilitating credit access for SMEs BUSINESSES AND STRENGTHEN Sustain the competitiveness and soundness of Italian Map the new risks for firms and distribute more complete manufacturing, reducing risks of bankruptcy and RELATIONS BETWEEN BANKS AND insurance instruments protecting the personal wealth of businessmen INSURANCE COMPANIES TO SUPPORT GROWTH AND Convince SMEs of the need for professional risk EXPANSION OF SMALL AND Improve relationships between banking, insurance management MEDIUM-SIZED ENTERPRISES AND and business Joint initiatives by the insurance industry and business ENHANCE THEIR INTERNATIONAL Facilitate SMEs’ access to credit associations COMPETITIVENESS Reduce the tax rate on non-life insurance policies for businesses SMEs AND FINANCIAL MARKETS DESIGN AN ADEQUATE LEGISLATIVE/REGULATORY Take advantage of the introduction of Solvency II to FRAMEWORK AND PROMOTE enhance the role of insurance as institutional investor Actuate the potential of the insurance industry in Shifting 2% of insurance company technical ACTIVE COOPERATION BETWEEN capital markets reserves into private equity and 2% to PUBLIC AND PRIVATE, IN ORDER Design an ad hoc policy with medium to long-term corporate bonds could free €9.7 billion TO UNLOCK THE POTENTIAL OF THE objectives to increase the insurance industry’s support Increase support to innovative SMEs with high growth for support of innovative SMEs INSURANCE INDUSTRY FOR to innovative SMEs with high growth potential potential A shift of 5 percentage points of insurers’ FINANCIAL MARKETS, IMPROVE Improve national infrastructure endowment, improve bond investment to local bond issues FIRMS’ COMPETITIVENESS AND Develop adequate financial instruments to encourage services for people and businesses could free some €13.3 billion for FOSTER THE GROWTH AND insurers to invest in improving strategic infrastructure infrastructural investment DEVELOPMENT OF THE COUNTRY (AND OF EUROPE) Source: Calculations by European House-Ambrosetti FIGURE 3 Recommendations and impacts: natural disasters and terrorism IMPACTS AREA RECOMMENDATIONS GUIDELINES QUALITATIVE ECONOMIC ESTIMATE Reduce uncertainty, ensure greater protection against Promote the creation of an integrated system at European large-scale damage FORGE A PARTNERSHIP BETWEEN level for handling large-scale damage PUBLIC AND PRIVATE SYSTEMS Quicker and more equitable compensation for citizens NATURAL WITH THE AIM OF FOSTERING Design an efficient risk coverage system, including by By comparison with the present situation, DISASTERS PREVENTION AND ENSURING automatic extension of natural disaster coverage in fire Greater risk prevention public-private partnership could generate AND TERRORISM EFFECTIVE AND EFFICIENT policies savings of up to €22 billion over ten years COMPENSATION PAYMENT TO Produce clear, precise rules enabling the private sector CLAIMANTS Promote the role of the State as insurer of last resort to play a significant role in preventing and managing major risks Incentives for risk prevention at territorial level Source: Calculations by European House-Ambrosetti THE CONTRIBUTION OF THE INSURANCE INDUSTRY to economic growth in Italy and Europe
    • 06 Conclusion (57-60) 05-09-2007 19:00 Pagina 59
    • 06 Conclusion (57-60) 05-09-2007 19:00 Pagina 60 Printed on September 3rd, 2007 by Grafica Cristal s.r.l. Via Raffaele Paolucci, 12/14 - 00152 Rome