On Compassion: Why There's Revenue in Caring
One of the most pressing issues to be unveiled by the credit crunch is our over-reliance on insurance. This is a problem so enormous that it threatens a system collapse in healthcare and pensions around the world. A potential solution to this problem could be a risk and cost-reduction brought about by a simple human state of mind: compassion.
The invention of one of the most important financial products known to mankind was born out of an overwhelming sense of empathy. Scotsmen Robert Wallace and Alexander Webster were so shocked by the number of widows and orphans living homeless on the streets of Britain during the Napoleonic Wars in the late 18th century, they decided to start 'The Widows & Orphans Fund'.
Financial time capsule
Rather than founding a charity, Wallace and Webster used their business acumen to devise a more sustainable financial product, which we now know as ‘insurance’. This is how the first insurance company in the world was born. The basic idea of insurance is that a pot of money, if big enough, can do two things at the same time: provide money for people in need now, while continuously growing for the future. In essence, insurance is like a financial time capsule: the money is only ever drawn out of the pot at a very specific moment, such as an accident, a theft, or a health or employment issue. The rest of the time the funds are able to grow freely.
Modern day economies, however, have become addicted to these burgeoning time capsules. The commonly used term is ‘over-insurance’. A little known fact about the credit crunch, for instance, is that the subprime mortgages at the root of the crisis were so-called ‘asset-backed securities’, meaning insurance companies had to pay out big when they inevitably defaulted.
On a global scale, highly developed economies like those of Japan and Western Europe are now starting to feel the consequences of being over-insured. Ageing populations are consuming the healthcare and pension reserves, while younger generations simply don't have the resources to refill the pot due to the lasting effects of the crisis. Even if they could, they're unlikely to do it willingly - and who can blame them? Chances are the pension fund will have collapsed well before they reach the age of retirement. A leading Dutch financial newspaper recently estimated that, by 2030, people would effectively be working three days out of five for their parents’ pension. In other words, why would any young person choose to contribute to a pension fund?
Reorganising our risk
It seems the riskiest thing to do these days is to insure against risk. How to address this? We can identify three paths to organising our risk differently.
The first is essentially a reinvention of the insurance company itself: an insurance provider without a desire for profit. These types of insurance companies give bonuses to people who claim less, a system of social pressure that transpires to grow the pot faster than the ‘normal’ situation. Variants are companies without bonuses or shareholder payments, ensuring that there is always enough money - even in times of crisis.
A second solution lies in the exponential growth of a group of altruistic concepts, known collectively as the 'sharing economy', among younger generations. Instead of securing their assets, this generation spreads the risk by sharing their assets; a financially democratic movement if ever there was one. They share a car, a house, gadgets, tools - you name it. Not owning these objects means we don’t have to insure them or, at least, we share the insurance burden.
The third solution can be seen on the deepest societal level. Many of us are reverting back to traditional, communal systems in which our family and friends meet our most basic health and financial needs. The kids pay the bills and look after the elderly, instead of leaving it to insurance companies and healthcare providers. Just like the old days.
The basic elements of all three solutions are both a newborn sense of compassion and a general demonetisation of the risk process. Whatever your opinion on these developments, it has become evident that we are seeing an altogether different kind of financial time capsule rising up. If you or your business wish to anticipate these changes, our advice should be clear: show compassion.