The Great Risk Transfer is underway
Since the start of 2020, the IFoA has been exploring the transfer of risk from institutions to individuals.
In the 21st century, many financial risks that used to be borne by governments, financial services providers and employers are being transferred to individuals. This change is giving many people the freedom to manage their own finances as they see fit. But making these choices and managing these risks can often be extremely complex.
Evidence of this shift exists in a number of areas of public policy and actuarial work and amounts to a profound change in the way that individuals organise their life and finances. Meanwhile, levels of numeracy, financial literacy and understanding of risk are low, meaning large parts of the population are not well equipped to deal with the risks they now face.
This transfer of risk poses important questions about the changing priorities and responsibilities of the institutions that once managed those risks. In financial services, it means greater thought about how to ensure consumers are equipped to make decisions that are in their best interest. In public life, it means taking a close look at the relationship between citizens and the welfare state, and questioning whether the current balance of individual and collective responsibility is right.
Our interim findings
Since the start of 2020 we have been collecting evidence from actuaries and interested stakeholders about how the Great Risk Transfer is manifesting in practice, how this is affecting people, and what can be done to help those who may be disadvantaged by the trend.
The interim report sets out what we now understand about the extent of the Great Risk Transfer, and its implications for society, informed by the insights we have gathered through our recent call for evidence.
We see the Great Risk Transfer occurring across four distinct areas:
Through the rest of 2020 we will be working with experts in these areas to look in more detail at the regulatory and public policy recommendations that could help protect people against some of the more negative impacts of these risk transfers.
“The IFoA is calling for a public conversation about which risks are worth taking and who should stand behind those risks. Over recent decades, institutions and governments have sought to de-risk in order to manage uncertainty. In trying to reduce or eliminate risk, they have often transferred it to their customers or citizens, who are less well equipped to manage it, often without understanding their needs or preferences.
Many individuals will have been affected by the transfer of risk in more than one area of their lives. The evidence suggests that only a minority will be truly equipped to deal with the aggregate impact of these risks, and make the most of the flexibility and choice they are offered by taking them on.
Responses to the call for evidence have helped us look beyond actuarial practice areas to examples in other areas of society where this trend is taking place. These have helped to expand our understanding about the root causes and societal implications of risk transfer, and will inform our recommendations for a meaningful change in UK government policy.”
Immediate Past President of the IFoA
Our next steps
We have developed our understanding of the Great Risk Transfer, and confirmed the widespread consensus that this is an area that warrants further research.
The need to rebuild the economy and society in the wake of the COVID-19 crisis gives us a unique opportunity to re-examine, and perhaps re-invent, the way risk is shared. We will be using the second part of 2020 to look at how public policy can and should react to the Great Risk Transfer.
We’ll do that by asking:
- Is responsibility for risk currently sitting with the right parties?
- When is risk sharing preferable to risk transfer?
- What should the State’s role be?
- How can we incentivise institutions to innovate?
- How can communication and education be improved?
- Is regulation too rigid?
- Is conduct regulation impeding innovation?
To get involved in this conversation as it develops please get in touch! Email: Policy@actuaries.org.uk
At our launch event in January attendees heard from the Australian researcher Myra Hamilton, whose work engages with the Great Risk Transfer, not only from a financial services point of view but more broadly in terms of changes to our politics and society over recent decades.
Case study - Risk Individualisation in UK Life Insurance - by Arjen van der Heide
Dr Arjen van der Heide’s research explores how risk has been individualised in the UK life insurance industry over recent decades.
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