49

2. Risk transfer as an evening out in "time" and "space: the individual does not
necessarily avoid the financing of the consequences of the risk that occurred because of the
transfer of risk, in fact, in the majority of cases he has to pay more, than without the risk
transfer. Still, it is a very useful and important thing, because it results in the evening out of
the cash flow, so via the risk transfer he trades the uncertain, large loss (including the
catastrophe the collapse of the cash flow!) for a series of certain, small losses (payment of
the fee).
This idea is equivalent to regarding the risk transfer as a way of evening out in "space", so
something which allows a one-time large loss to be distributed "in space" among the current
members of the risk community, since the large risks are unpredictable with respect to each
individual, but with respect to the risk community as a whole it is a rather regular occurrence.

The usability of the risk transfer depends on the frequency of each given risk. Three
different cases should be distinguished:
occur frequently during a person's life (for example, a cold)
occur rarely, but probably a few times during a person's life (for example, illness
that lasts a few weeks)
occurs only once or never during a person's life (catastrophic) large loss (for
example, complete loss of ability to work due to car accident).
In each case a different strategy should be followed, and there are different expectations of
what the risk transfer should provide.
In the first case, it is not appropriate to use any kind of risk transfer, this can be solved
individually (with the use of short-run reserves).
In the second case, it all depends on the extent of the risk. If the loss that occurs
infrequently is significant, it is worth using the risk transfer, if not, then the solution via
individual means is best here as well. At the same time, if risk transfer occurs, another
requirement appears regarding the evening out in time, namely: for each person the amount
paid during the life cycle (subtracting the risk premium and the administrative costs of the
risk community) should be in balance with the amount used.52 Then the main purpose of the
risk transfer is the evening out of the cash flow.
In the third case, risk transfer is pretty much mandatory, and, naturally, the addendum
above regarding the evening out in time does not apply.

Insurance is the most important private method of forming a risk community, and gives the
best examples of risk transfer. We can also say that the
Insurance = risk transfer realised via a virtual (risk)community
The remaining chapters will deal with insurance in greater detail.

One of the most important functions of both the risk community (or of the risk transfer and
insurance) and the accumulation of reserves is that they allow the cash flow to be evened
out in the case of unexpected events, so the person does not have to diverge significantly
from his original life plan. So they make it possible to plan our life cycle ahead of time, and to
stick with this plan. In a financial sense they make computability possible.
There remains one important question, which has to be made clear, namely: who has
interests in the individual's life, and its suitable financial planning, how do these appear,
and how can these be asserted? In the following we will summarize the most important

52
Some authors, mostly dealing with policy issues, have a tendency to only look for state solutions to risks of this
nature, and they cover up the question of the balance between contribution and usage with an ungrounded and
not well-defined notion of "solidarity". As it will be seen later on, I try to define the operational space of solidarity
in a much smaller space and more precisely.

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observations in table form, specifically noting the most important private solution from the
point of view of this material, personal insurance.

Who has an what are the How are these The role of personal
interest regarding interests? realized? insurance
the life of the
individual?
The individual Maintaining the living Precautionary saving-type products,
himself standard attained in saving; annuity; annuities, accidental
the active phase, accidental and and medical insurance
ensuring its safety; disability insurance, on a voluntary basis
protection against the medical insurance;
inability to work; leaning on the state;
ensuring the re- leaning on
establishment of the acquaintances,
ability to work relatives, altruist
institutions
The state - social stability - redistribution, Can do everything
- management of mandatory except for redistribution
obligation to provide precautionary saving if allowed to
for citizens and planning
- maintenance of These can be
international achieved in a
competitiveness via separate state
the improvement of the system or via market
state of the population agents
Left to goodwill
organizations
Dependents of Financial security in The individual takes Either in its entirety, or
the individual the event of a fallout in care himself as a complement to the
(children, spouse) earned income leaves it to the state
state, acquaintances,
relatives, altruist
institutions
Those effected by So they get their Via insurance on Almost entirely on a
the individual's life money even in the the individual's life, private insurance basis
(creditor, employer) individual's absence, health etc. often with group
or to substitute for him insurance
quickly
Voluntary social Lowering of social Voluntary Not much can also
organizations inequality redistribution support these
Business partners Taking over business Private insurance Entirely his own
ownership, business
organization of other
business advantage
via the provision of
personal insurance (for
example, gift of
accidental insurance
built into a card )

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Table 2.5.: The interests related to the life of the individual and their methods of
realization

It can be seen in the above that the individual does not always assert his interests himself
(although this would be ideal, and that is the message of this material, that everyone should
realize these consciously and as independently as possible), and that in some cases, the
individual is not the only one with an interest in his life. If someone else acts in the place of
the individual, in an optimal case it is for the following reasons:
They see the interests of the individual better than he himself (for example the state
recognizes earlier the need for saving for retirement and makes it mandatory).
If the individual does not directly have interest in his life (health, etc.), or if his
interest in this respect is less, than others' (for example he is the key worker of his
employer, or the creditor's interest).
The individual is in a dependent position (e.g. child, dependent, disabled).
The individual is sometimes (or in some cases always!) irresponsible.
We also assumed the ideal of the self-reliant middle-class person. Self-reliance of other
classes (as we have seen earlier) may differ from this. For example:
Upper classes: have no need for the risk transfer realized via risk communities
Lowest classes: cannot support themselves. Some of their care is taken over by the
middle classes (through goodwill organizations and individual donation), since it is
also in their interest to assure they do not spread epidemics, and that they do not
worsen the public situation.
TEST
1) Which of the following statements about the cash flow of the life cycle are true?
a) in main lines it contains the revenues (incomes) and expenditures of the individual,
and shows their accumulation and balance as well.
b) it starts from 0 when an individual is born always, under any circumstances.
c) its structure does not change in its basic principles during the life cycle, though it
differs by social class.
d) defence against the risks threatening the cash flow is mainly the task of the state.

2) The risk transfer

a) allows the individual in exchange for the risk premium to sell those risks, which he
faces during his life cycle, but which surpass his ability to bear risk.
b) need for the risk transfer does not depend on the individual's financial situation, but
can be regarded as a universal human need.
c) is typically a good solution for defence against frequent, relatively small losses.
d) allows people to pay less overall (in expected value) for the negative effects of risks
than would be the case without a transfer of risk.

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3. THE LARGE SOCIAL SECURITY SYSTEMS

KEY WORDS
Transparency Institutional care
Equivalence Income transfer
Individual account Self caring
Insurance consciousness Open system
Pay-as-you-go system Solidarity
Transferability Defined contribution principle
Institution Closed system
Institution system

Institutions that enable people to plan their lives have been discussed throughout the
previous chapters only in a very general way. References have been made to institutions like
individual insurance, social security and accumulation of wealth and to principles such as
self-care and solidarity. Readers have been informed that institutions and methods
connected to certain institutions will be discussed in later chapters. Here comes a very
general summary of what have been said about the institutions, and we will compare their
main features. In a developed society, the different methods and institutions of care/self-
care usually form an interconnected system, the elements of which are in interaction with
one another, and mutually define each another.
Above, all through discussing the planning of cash flow, the need for self-care has been
emphasised. So now, in connection with the institutions, first of all, we should examine the
question whether self-care is opposed to other institutions of providing care? The answer
beforehand is: no, and it is highly important to note that, contrary to a number of popular
opinions of these days, self-care and solidarity are not opposite of each other.
3.1. SOCIAL INSTITUTION SYSTEM AND SELF-CARE
We have to notice that self-care and relying on social institutions are not conflicting ideas,
thus the presence of one of them does not exclude the other. In a way, self-care is a kind of
social institution to rely on. So to say, contrasting self-care and other ways of providing
care is rather a question of consciousness and methodology. But what is all this about?
Lets suppose that somebody completely cares for himself, meaning that he does not
belong to any risk community (he does not take out an insurance, does not resort to the
services of social security), and does not accept any services gratis, not even if offered by
his family. He makes his living by the incomes of his labour and capital throughout his life
cycle. If somebody is able to do this, we can be sure that the society he is living in is quite a
developed one, and that it has built up a system of social institutions (or caring
institutions), which makes this possible. In such a society we certainly can find:
a system of capital investments,
institutions that protect property,
a healthcare system that provides services on a wide range (including home care
services),
a comprehensive financial accounting network,
a wide range of rules and conventions, both formal and informal, which are known
and accepted by members of the society,
appropriate mental attitude of people, which enables them to accept such rules, and
to operate the institutions.
Someone who was born into a society like this takes the operations of these institutions for
granted and does not realise that it must have taken a long, historical period for this system

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to develop, and that there are societies even nowadays, where such institutions have
evolved only partially (see most of the Sub-Saharan countries, Laos, Papua New Guinea,
etc.); or where it is just being born on the ruins of a past regime (e.g. Russia), where due to
the lack of institutions, the stronger and more aggressive members of society consider the
others as resources and form their own society in smaller groups (i.e. they are operating a
mafia).
After all, such institutions aim to provide for the needs of individuals in a very general sense
(in a way that, they provide everyone access to the common goods based on equal
principles, and breaching of these principles is sanctioned in order to maintain and operate
the system).
Of course, self-care does not only mean the situation in which someone relies only on
his own resources. Relying on voluntarily founded common resources (risk communities) is
also considered to be self-care, since it is based on voluntary and conscious sharing of
risk. In such a case we can speak of the self-care of a group.
If a country doesnt deprive another country systematically of its resources with nothing in
return (exploitation), or vice versa53, then the population of that country, as a group, can be
considered to be self-caring, for they can rely only on themselves54.
Such national level self-care can be organised in several forms, but it is certain that its
source is the work of the individuals living in that country and the return on their capital.
When organizing self-care on country-level, it is worth respecting the following principles
as fully as possible:
Principle of solidarity: life situations, where people get into through no fault of their own
(e.g. congenital diseases, belonging to disadvantageous social groups), or get into through
their own fault, but cannot get out on their own (e.g. different types of addictions or having a
criminal record), are defined as precisely as possible, and people in such situations are
supported by the others free of charge55
Principle of equivalence: above their parts of the solidarity contribution and the amount
needed to maintain the social self-care institutions, every individual should receive in
expected value as much material goods and services from the institutions as he pays in
in expected value.
Principle of transparency: it must be clear to individuals what costs what in the institution
system, and what is happening with their money.
Principle of insurance consciousness: individuals should pay their contributions
consciously to the system, after considering their own long term needs.
A great number of countries (including first of all Hungary) operate a social self-care
institution system that respects the above mentioned principles only partially. In Hungary, for
instance, only the first principle is realised more or less!56 Due to the partial operation of
these principles, the role of the individual is lost in the institutional system, thus it is usually
not labelled as self-care. Moreover, self-care appears as an alternative to this institution
system, contrasted to it.

53
And nowadays, lack of exploitation is one of the most important requirements in international relations, so we
may assume that it does not exist. It is not our task here to discuss the problems of international exploitation.
54
Except, of course, in case of huge disasters, e.g. earthquakes, when international actions of solidarity take
place, and the activities of certain international charity organizations, by which goods flow systematically, and
free of charge, from one country to another. However, these actions do not represent a significant volume, at
least in case of the developed countries that we examine, that we consider more or less the OECD countries
(so Hungary is considered here to be a developed country!)
55
Solidarity is a very interesting and important topic, and it will soon be discussed in more detail. But it is
important to note here, that from the point of view of a society, solidarity only makes sense if its goal is to enable
those who are supported to leave the situation in which they need to be supported (considering the fact that as
far as we know at present in some cases this is impossible).
56
It is important to note, that defenders of Hungarys outdated social care system refer to the principle of
solidarity in a scope much wider than it would be justifiable, they are glamorising it, and most of all, they contrast
it with the other principles.

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In our view, self-care is when an individual is consciously planning his future needs, and
then, taking the number of alternative social institutions he chooses the ones that mostly
adhere to the principles above.
3.2. INSTITUTIONS OF CARE AND SELF-CARE
The question is what kinds of institutions the individual can choose from (if he can choose
at all)?
3.2.1. Institutional Care Throughout History
The first question arising is what can be considered as institution? The notion institution
can be defined in a way that any kind of more or less standardized method, which is used
not only in a limited sphere of life (e.g. a joint family looks after the elderly) is considered to
be an institution. Here in the following, institutional will be used in opposition to personal,
so it refers to impersonally organized, standardized social functions57.
Throughout history, as standardized personal methods of caring turned more and more
indirect and impersonal, institutional forms defined as above have gradually grown out of
them. The main (standardized) personal forms of care (and their social frameworks) are:
tribe,
joint family,
family,
village community,
professional group.
The extent of the care provided is determined by the resources available for that particular
group of people. In rough circumstances communities used to get rid of the ones who
58
were, in the long run, incapable of living. But normally these individuals were taken care of
by their relatives, and since due to high mortality rates the web of relatives might have
been rather incomplete and it was not rare that members fell out of it, people kept count of
relatives in a wide circle. Orphans were brought up by their uncles, the elderly were looked
after by their children, and if they were already dead, then the closest living relatives
provided care for the ones in need. As society was developing, an increasing number of
impersonal modes of care (institutions) came into existence, and relieved people, who
started to draw the boundaries of relations in a narrower circle. It is understandable that
people preferred institutional solutions, because in spite of the fact, that personal
relationships ensured safety for the ones in need, but on the one hand they meant a certain
threat to those who had to provide care, since they might have had to bear a
disproportionately huge burden and responsibility. All these are shared within a wider range
in case of institutional forms of care giving; however this can be arranged only in a society
that operates within rather stable conditions. (As soon as the frameworks of a society start to
loosen, due to a war or depression, personal relationships are again highlighted, and people
rediscover kinship, and get in touch with relatives they never knew before.)
The caring function of personal and family relations are quite apparent in such reciprocal
activities as for instance kalka (a team that gathers to build up the new house of one of its
members), or sending kstol (titbits sent to relatives, friends or neighbours from the meat
made at the pig-killing), which are still common practice in some regions of Hungary.
The tribe joint family family line can be interpreted also in a way that keeping count of
relations started to reduce on this line parallel to the consolidation of social conditions and
more institutional solutions were created (e.g. charity institutions of the Churches). Village
communities and professional groups (e.g. guilds that looked after the family of a deceased

57
E.g. a home of elderly, where people get into through impersonal mechanisms like paying the fee instead
of personal relations.
58
See Taigetos in Sparta, where crippled children were taken, or the Mount Narayama in Japan, where those
who got older than 70 years were taken to die.

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