The Institute and Faculty of Actuaries (IFoA) has published its ‘Great Risk Transfer Interim Campaign’ report. The campaign, launched in January 2020, was set up to investigate the increasing transfer of risk from institutions to individuals when it comes to planning their finances.
John Taylor, immediate past president at the IFoA, said: “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. And it’s really important to note that those less able to afford to manage or mitigate the risks are disproportionately affected.
The call for evidence was launched in January, but many submissions came in during and after the global spread of Covid-19. During the crisis, many governments have stepped in to bear financial risks in specific areas as they seek to support and protect workers and businesses. But most of these measures have been designed to provide a short-term boost so it’s unclear if this reversal will result in a long-term change in policy.
John Taylor continued: “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. As we work to rebuild the economy and society in the wake of the crisis, we have a unique opportunity to re-examine and perhaps re-invent, the way risk is shared between people, companies and the government.”
Responses to the call for evidence indicate that the ‘Great Risk Transfer’ is manifesting across four main areas:
The closure of defined benefit (DB) schemes and the ‘Freedom and Choice’ agenda in the UK have led to individuals taking on additional investment and longevity risk, as well as the risk that they do not save enough to fund the sort of retirement they aspire to.
Advances in data science have changed the fundamental nature of risk pooling in insurance. This means that individuals’ insurance premiums are more directly linked to their risk profile. As a result, those considered ‘riskier’ by insurers (often through no fault of their own) face higher premiums, sometimes to the point where insurance becomes unaffordable, and individuals are forced to shoulder risks themselves.
The changing nature of work is leaving many more people in insecure employment, increasing the pool of those in low-paid self-employment, agency, casual and seasonal work, or on zero-hours contracts. These workers do not have access to many of the benefits associated with traditional contracted employment, leaving them exposed to a range of employment risks.
The privatisation of adult social care since the 1980s has coincided with decades of longevity improvements. Trends in healthy life expectancy have not kept pace with this, meaning more and more people require social care in later life. Additionally, during the COVID-19 pandemic there has been an increasing discussion about how the risk of further transmission should be shared between authorities and individuals.