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The Great Risk Transfer

The results are in from our campaign’s initial call for evidence.

In January 2020 the IFoA launched its Great Risk Transfer campaign. The campaign explores the different ways financial risks have been transferred in recent decades from institutions – such as employers, insurers and the state – to individuals. Since January we have been collecting evidence from actuaries and others about how this trend manifests in practice, and have received more than 50 submissions.

Today we launch our interim report of findings.

 Here are four things we’ve learnt during the call for evidence:

1. There is broad agreement that this is an issue that warrants further research

It is no surprise that the Great Risk Transfer has struck a chord with actuaries. Many respondents talked about what John Taylor called the ‘great irony of the Great Risk Transfer’: institutions that have access to risk expertise are passing the risk to a less-informed group, i.e. individuals. We have seen this across the pensions, insurance and investment landscape.

Since January we’ve also had dozens of conversations with organisations outside the actuarial profession that have provided examples of risk transfer in their areas of work, and have agreed that the issue is important and should be explored further.

We’ve heard examples from experts in employment practice and the gig economy, financial education and social care. As is often the case, collaboration between actuaries and others will be key to raising the profile of this theme in the campaign’s next phase.

2. The Great Risk Transfer taps into more fundamental social and political issues

Our submissions have gone far beyond insurance and pensions. To understand the Great Risk Transfer, we’ve also been forced to consider more fundamental questions about how society is organised. In any society, ideas about who should be responsible for financial risks are likely to reflect the extent to which it emphasises individualistic or collective values. The idea of risk transfer is an interesting lens through which to consider governments’ approaches to social security, for example.

There may be cultural differences between countries’ values, but in recent decades there has been a common trend in developed economies towards increasing the risk burden on individuals. Researcher Dr Myra Hamilton talked about this in more detail at our launch event. 

The role of the State as ‘insurer of last resort’ is also a common theme, as are questions about the level of social responsibility we expect businesses to demonstrate in a modern society.

3. The Great Risk Transfer can both provide benefit and do harm

Keen not to lead conversations about whether the Great Risk Transfer is ‘good’ or ‘bad’, we’ve tried to consider who may benefit from the trend and who may be harmed by it.

For some customers who can afford to take on risk, and have the financial literacy to engage with products, the associated choice and flexibility is often desirable. Having individual control of their finances may, for example, mean customers can avoid the costs of guarantees if they have little need for them.

However, a larger proportion of consumers may be forced to accept risks if the cost of mitigating them is uneconomic. In addition, basic financial planning advice is often not available, and more complex advice can be prohibitively expensive.

The focus of our next phase of work is likely to include ideas to help this second group to manage the risks they now face.

4. COVID-19 has changed, exacerbated and highlighted many areas of risk transfer

COVID-19 has introduced new challenges and more uncertainty, rocked markets, and forced the idea of individual risk management into the consciousness of populations around the world. How well did previous governments manage the risk of a global pandemic before the fact? How should the risk of further transmission be shared between authorities and individuals? Will governments look to outsource these risks to insurers in future?

These questions are all relevant when thinking about how society deals with large systemic risks in general. We may think of risks such as COVID-19 and climate change as being the responsibility of government, but we as a society all bear the risk.