In this post, we thought we would consider the potential impact of the recently-published and seemingly controversial book by the French economist, Thomas Piketty (now close to achieving Michael Lewis-like “rock star status”), entitled: “Capital in the Twenty-First Century”. This work has been reviewed by the most illustrious economists, by some more favourably than others; Piketty has been debated by Nobel Prize-winning economists; and been attacked by the US “conservative faction” (putting it no more specifically than that!)- all signs that a single book may be changing people’s perceptions about topics such as wealth-allocation and accumulation; income distribution; and fair taxation policies. Of course, the allusion to Marx’s Das Kapital, also engenders foaming at the mouth in certain quarters!
By now, our readers are probably rolling their eyes; and wondering what this all has to do with the world of (re)insurance: a fair question.
To compress many hundreds of pages into one sentence: the rise of a more equal, income-based society post World War II, was an aberration, in the long term domination in most societies of so-called “patrimonial capitalism”- i.e., wealth accumulated and controlled by very concentrated segments of a society.
Why does this matter to (re)insurers? Because Piketty’s thesis leads to the thought that if wealth is increasingly “patrimonial” and not as widely-shared as expected, consequences may include not only rent-seeking, inefficient allocation of capital, and the increasing domination by oligarchic elites, but also the potential for disaffection and agitation, rather than a steady evolution of more equal societies.
Again, perhaps more rolling of the eyes!
Then consider this: (re)insurance is a regulated industry and that regulation is of increasing severity and complexity ((re)insurers being “collateral damage” for the malfeasance of much of the western banking system). Who controls the regulators; and who controls those who control the regulators? We have already seen comments that the SEC turned a blind-eye to certain demonstrably illegal actions by exchanges in the context of high-frequency trading (HFT), which clearly enriched a lucky few at the expense of the great multitude. What would happen, if regulation was controlled by those whose interests were entirely selfish and self-interested? Adam Smith’s “invisible hand” would start to twitch and become palsied.
And then there is rent-seeking and mis-allocation of capital. (Re)insurers depend upon the ability to invest and allocate capital as they see fit to earn rational, risk-adjusted returns. What if regulation and markets are distorted in ways that are covert and designed to benefit a narrow oligarchy that believes it knows best. We have spared the reader visions of future property and casualty risks!
Perhaps we at Awbury are paranoid; but being paranoid may help one survive somewhat better than those who dismiss something out-of-hand as being irrelevant or “not my problem”. If nothing else, think about the issues we have raised; and decide for yourself.
-The Awbury Team