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

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 Focarelli
Sergio Desantis
Carlo Savino
Paolo Zanghieri

Ambrosetti-The European House working group:

Paolo Borzatta
Stefano Bosisio
Alberto Camatini
Michel Greiche
Mauro Maraschi
Stefania Santamaria
Jan Schuppius
Leonardo Zannier

Thanks 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, Prudential
UK, former President CBI), Gerardo Arósegui (CEO, Aviva Grupo Corporativo) representing Guillermo de la Dehesa (President, Aviva
Grupo Corporativo), Giancarlo Giannini (President and Director General, ISVAP), Pilar González de Frutos (President, UNESPA), Stephen
Haddrill (Director General, ABI), Thomas Hess (Chief Economist of the Unit Economic Research and Consulting, SWISS Re) representing
Roger 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 Corporate
Law 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 General
Competition), David Snyder (Vice President, AIA) representing Marc Racicot (President and CEO, AIA), Domingo Sugranyes Bickel (Vice
President, 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, European
Commission – Directorate General Internal Market), Ignazio Visco (Vice Director General, Banca d’Italia), Steven Weisbart (Insurance
Information 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, Insurance
Information 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


5
TABLE OF CONTENTS

II.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................................................. 41

II.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 INDUSTRY

III.1 The pension system ............................................................. 45
III.1.1 Recommendations for European policy-makers............................. 45
III.1.2 Value creation impact simulations.................................................. 47

III.2 Health and long-term care ..................................................... 48

III.3 SMEs and financial markets ................................................... 51
III.3.1 Recommendations for policy-makers in Italy and Europe .............. 51

III.4 Natural disasters and terrorism ............................................... 55

Conclusion: Recommendations and impacts: an integrated vision.............. 57


7

Premise: The purpose and subject of the research project

The context of discontinuity and drastic change affecting national economies in our
time 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 together
with substantial and sustainable economic growth.

Sound understanding of the insurance industry and its potential is essential to the
proper 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 new
needs of society in many fields (welfare, health, assistance, income security during
and 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 act
upon some of these points, provided that we look thoroughly into the role of the State
and the function of services.

Broader and more intelligent recourse to insurance can contribute to the entire health
and welfare system, freeing public resources and managing private resources more
efficiently. A public-private partnership, for instance, could contribute significantly to
the 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” capital
that can be acquired via insurance instruments, thus utilising their own risk capital in
more efficient fashion.

Insurance makes the most of the “culture of merit”, in that it rewards the most efficient
agents, i.e. those that manage risk more carefully. Greater resort to insurance would
make no small contribution to enhancing the merit orientation of the entire society.

However, rethinking and capitalising on the insurance industry’s potential contribution
to Italy and to Europe requires a synergistic effort involving national and Community
institutions alike.

This vision, with the opportunities implicit in it, needs to be communicated clearly and
scientifically documented to Italian and European policy-makers, to help them realise
how to use and regulate the insurance industry in a modern and above all efficient
manner.

On these premises, this research project brings out the fundamental contribution that
the insurance industry can make to the achievement of certain objectives of growth
and 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 that
have a vital bearing on welfare and growth:

– the pension system;
– health care;
– SMEs and financial markets;
– natural disasters and terrorism.


8

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.


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 EUROPE

I.1 The size of the insurance sector: international comparison
The importance of the insurance industry is conventionally measured as the ratio of
total premiums to GDP (the insurance penetration index). This is higher than 10% in
the 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 1995-2003

The gap is wider in non-life insurance, where the ratio of premiums to GDP is above
6% 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 the
EU-25.

7.0% 1995
6.2%
FIGURE I.2
2004
6.0% 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%


5.0% 1995 4.7% FIGURE I.3
4.5% 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


10

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.


11

cator rose significantly between 1996 and 2005, from 6.9% to 24.8% of GDP, but is
still well below its level in other European countries. The data thus confirm that the
Italian insurance market is not yet mature, so there is still scope for growth in the
life sector.

120.0% FIGURE I.6
110.0% 107.3%
Life insurance mathematical reserves/GDP (%), 2005
100.0%
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%
United Kingdom France Netherlands Belgium Germany Italy Spain OECD data

I.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 the
insurance sector, have an idea of how the context is changing, and reflect on the
industry’s characteristics and potential. A thorough analysis of the reasons for the
relative lack of development of the insurance industry in Italy and, in some specific
sub-sectors at least, in Europe will be provided in the next section. Here, we set
forth the reasons why the insurance industry has a key role to play for the efficient
operation of the economy, contributing to growth and employment. Underdevelop-
ment of the insurance industry can therefore be a factor inhibiting economic
growth.

I.2.1 How the frame of reference is changing: The “four challenges” of our
time

Our epoch is one of constant, drastic change, often swift and unpredictable, which
inevitably affects business models and civil society. The global context is one of
ceaseless, 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 begin
rethinking our business and welfare models as a precondition for contributing con-
cretely to robust economic growth and significant value creation in Italy and
Europe.


12

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


13

FIGURE I.7
THE INSURANCE INDUSTRY PROVIDES SIX STRATEGIC ASSETS TO SOCIETY The social value of insurance

EFFICIENCY/
FREEDOM SECURITY HEALTH WEALTH FLEXIBILITY
LEGALITY

To 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-Ambrosetti

I.3 How the insurance industry can foster economic growth

The 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 creation

ENCOURAGEMENT OF SOCIAL BETTER FINANCIAL CAREFUL RISK STABILISATION OF
ENTREPRENEURSHIP 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 help
additional 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 cycle
market more dynamic to capital resource use
and competitive

RISK POOLING AND TRANSFER
Source: European House-Ambrosetti

In order for the industry to play a truly important role in support of Italian social and
economic 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.


14

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.


15

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 Commission

I.3.1 Thanks to its broad range of business services, the insurance indus-
try can help improve business transparency and financial manage-
ment

Insurance enables firms to grow and deal adequately with risk without having to build
up precious reserves of capital. Appropriate insurance is particularly advantageous for
small enterprises, which by nature have limited capital and face greater difficulty in
obtaining access to the financial markets. Without an adequate insurance system, in
fact, they would need very substantial funds to guard against risks, and for many
small and medium-sized companies it would be difficult and highly costly to procure
this 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 against
risk and allocate them to growth, with a clear improvement in financial management.
The insurance system also performs the function of guaranteeing the vitality of the
myriad 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 market

For firms, the pursuit of business growth and innovation means taking risks. This in
turn 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 three
different 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 developed
insurance markets optimise the allocation of the scarce resource of risk-taking, con-
centrating it in the most innovative, high-potential sectors. Under-insured companies
generally fail to seize new business opportunities, they invest less in innovation, and
their international market presence tends to be weaker.


16

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.


17

As an institutional investor the insurance industry thus makes an invaluable contribu-
tion to the development and better working of the capital market. The financial system
in general – and within it the insurance system – plays a fundamental role in several
respects. It supplies long-term funds, smoothing out the effects of demographic
dynamics 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 the
arbitrary limits on investment in place in many member states.

Finally, a sounder, more dynamic, competitive financial market also contributes to
sustainable economic growth (Guideline 4).

I.3.5 The insurance industry helps foster a sensible risk stance on the part
of individuals and firms

The evaluation of risks made by the insurance industry is reflected essentially in the
costs and terms of insurance policies. In this way, the insured have an incentive to
lower their risk profile, to prevent or at least limit the potential loss. This encourages
virtuous 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. In
summary, 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 in
households’ decisions as well, helping to foster more intelligent attitudes, oriented to
the sustainable use of the resources available (Guideline 11).

I.3.6 Insurance helps smooth consumption over people’s life cycle

Consumption, 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, provides
economic resources in case of necessity and permits the stabilisation of income levels
over 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-cycle
approach to work (Guideline 18).


19
II. The insurance industry and its value for growth

SECTION II
THE INSURANCE INDUSTRY AND ITS VALUE FOR GROWTH

As 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 in
an 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 four
areas 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 industry
can 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-Ambrosetti

Following the overview of the insurance environment in Italy and Europe, the present
section focuses on the four fields mentioned above, adopting a single interpretative
key to cite evidence highlighting the magnitude of each phenomenon, identify critical
issues 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 at
releasing the insurance industry’s potential on behalf of growth and development in
Italy (and Europe). It also contains simulations of the possible consequences for value
creation. These rough-and-ready estimates, for which no claim of scientific rigour is
asserted, measure the resources that could be freed up for new investment and the
savings in public expenditure that could derive from greater penetration of the insur-
ance industry in the target areas of intervention.


20

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).


21

16% 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, 2007

8% 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 disabilities

One must also bear in mind that Italy’s ratio of public debt to GDP is by far the highest
in the European Union.

FIGURE II.4
110% 106.8% Public debt in selected EU countries as a
100% % 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, 2007

In order not to jeopardise the sustainability of the public finances, in the past fifteen
years the governments of many European countries, including Italy, have put in place
corrective measures aimed at curbing pension expenditure. Correction has been
achieved by gradually modifying pension eligibility requirements, pension benefits or
both.

With a view to ensuring adequate income protection for pensioners, many countries
have also adopted policies to foster the development of supplementary pension plans
and the consequent creation of a system in which the monthly amount of benefits a
pensioner receives consists of two distinct components:

– a public pension;
– a supplementary, private pension.


22

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 2050
di 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.


23

at 15.1% in 2040, when the system will be almost entirely contributions-based; it will
decline thereafter, to 13.8% in 2050. The projected “pension hump” is depicted in the
figure below.3

16% 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 data
13% published by the State Accounting Office in its national
2005 2010 2020 2030 2040 2050 scenario, December 2006

The State Accounting Office forecasts assume unchanged legislation, that is to say
they take into account both the enacted “big step” raising the minimum retirement age
to 60 for everyone as of 1 January 2008 and the ten-yearly revision, mandated by Law
335/1995, of the coefficient for converting contributions accrued under the contribu-
tions-based system into benefits. It does not take account of the legislation passed in
2007 or of possible future measures to boost low pensions.

The forecasts may require far-reaching revisions if the pension rules are changed as a
result 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 the
twentieth 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, base
2004). Even today, there are more people over age 65 than people under age 20; by
2050 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 male
lengthened 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 on
the public finances.

3
The State Accounting Office forecasts include disability, old-age and survivors pensions, net of
lump-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 not
include some non-pension benefits, e.g. benefits deriving from the interruption of an employment rela-
tionship.


24

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.


25

– 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), whose
entry into force was moved up to 1 January 2007,5 establishes equivalent treatment of
the different types of supplementary plan.

Despite the growth trend, documented by the Figure II.8, supplementary pension
plans 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, at
the end of 2006 13.9% of those eligible to enrol in occupational pension funds had
actually 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 plans
100% - (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 Rate

A 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 least
in 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 for
both its general provisions and its tax aspects, was advanced to 1 January 2007 by Legislative Decree
279/2006. The contents of Legislative Decree 252/2005 were consequently inserted into the text of the Fi-
nance Law for 2007.


26

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 plans
Source: European House-Ambrosetti, based on Fact-pack
Previdenza 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.


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