An ambitious vision sparks controversy and skepticism; a new book argues for redistribution of risk and wealth with such products as "livelihood" coverage. Critics warn of Big Brother overtones, financial chaos and compliance issues.

Academics have lined up to sing the praises of The New Financial Order: Risk in the Twenty-First Century (Princeton University Press, 2003), but don't expect much from the risk and insurance community beyond a few raised eyebrows.

Robert J. Shiller, a Yale University economics professor, argues in this provocative new book that retooling risk will help save people from "gratuitous, random and painful inequality."

One suggestion is to give disability insurance policyholders an opportunity to prove they're not "malingering," thereby reducing premiums by agreeing to close scrutiny of their personal lives.

Another is to offer "livelihood" insurance as part of a futures market through which at-risk professionals would trade based on educational guesses about the fate of their average income. Shiller also calls for reengineering the Social Security system so that retiree payments would be tied to the fluctuating incomes of working people.

'Buck Rogers Element'

Robert Hartwig, senior vice president and chief economist for the Insurance Information Institute in New York, has been a fan of Shiller's previous books dating back to his years as a graduate student. But not this time. After reading The New Financial Order, he said the book suffered from a "Buck Rogers element."

Risk-transfer suggestions are too dependent on the notion of harnessing emerging information technologies, and fall short on practical insurance issues required to enable Shiller's new-product ideas to work in the real world.

"He doesn't deal with the regulatory mechanisms for insurance at all," says Hartwig. Placing one of Shiller's new products on the market would require approval from insurance regulators in all 50 states.

Chris Mandel, chief risk officer for the Risk and Insurance Management Society Inc., and assistant vice president of Enterprise Risk Management in San Antonio, Texas, commends Shiller for challenging established paradigms and believes his credentials will serve him well along the way. While Mandel believes some forms of insurance can level the field for policyholders, he stresses that commercial insurance is intended to spread risk as opposed to achieving social equality.

The key issue isn't creating demand for new products so much as achieving "recognition that mitigation strategies and controls must be more carefully considered and applied in order to reduce risk to acceptable levels," he says.

Equity and Efficiency

Shiller says his book was inspired by Germany's 19th century export of social security as an extension of insurance principles. He sought to infuse his book with a similar theme: that insurance is a powerful tool for dealing with inequality in the modern world.

"A lot of people think there's a tradeoff between equity and efficiency--that if we have a very equal world, nobody is going to work hard," he says from his office in New Haven, Conn. "This is a moral hazard, which is something the insurance industry knows a great deal about."

His quest is to promote democratization of insurance so that it's much more applicable to everyone's risk. Shiller believes the explosion in information technology, economic progress and greater enlightenment present a golden opportunity to shape the future of insurance and financial institutions.

Risk managers who adopt Shiller's approach may play a pivotal role in advancing the need for change. "That means preparing ourselves for managing some of the bigger risks that are not yet managed," he says. Bold new-product launches, of course, take time to generate demand and excitement--requiring extensive sales promotion.

The question is, will people be willing to pay the premiums for these new products?

Risk managers and consumers alike will gladly pay the price-for products they consider valuable but will continue to balk at half-baked solutions that in recent years have included cyber risk and terrorism insurance policies, according to Mandel.

Still, he says, "the insurance industry hasn't kept up in innovation with other industries, least of all diversified financial services," and notes that a more concerted effort to develop technology standards would help this cause.

Jim Crockett, manager of risk and benefits for Denver Water, Colorado's oldest and largest water utility, is sympathetic to Shiller's push for greater equality, given that about 70 percent of the utility's more than 1,000 employees have fairly physically demanding blue-collar jobs.

"If they become disabled and unable to perform their duties," he says, "their chance of finding another productive job anywhere is not great because of their limited education and skill sets." He hopes The New Financial Order will provide insight into improving the utility's self-insured long-term disability program.

Fear of Big Brother?

While greater equality is no doubt a noble cause, Shiller's proposal of how to get there is paved with controversy.

Peter Coy, economics editor of BusinessWeek, recently labeled Shiller's view on disability insurance frightening. In The New Financial Order, Shiller writes that policyholders could be given an opportunity to prove they're not malingering--and, therefore, lower their premiums--by accepting "electronic scrutiny of their purchases and sales, of their Internet activity and of biometric identification systems that track their economic activities."

The idea is to establish a grid system through which individuals would be given the choice of feeding personal data to an insurer to help them better manage risk, as well as write insurance and risk-management contracts. Premiums, in turn, would be lower if insurers have better detection of those who are genuinely suffering from disability.

"In extreme cases," Shiller explains, "they could observe your credit-card purchases. It would be pretty hard for malingers to pretend they have a bad back when they're really out having fun because it would be detectable." While Shiller admits to not having worked out the details, he says the more information someone chooses to share with insurers, the greater the chances of lower premiums.

Shiller believes patient privacy will be protected by better encryption and biometrics. He also predicts increased regulatory scrutiny of electronic data. New medical privacy roles under the Health Insurance Portability and Accountability Act already signal an aggressive move in this direction.

"Malingering" Discomfort

Hartwig is uncomfortable with Shiller's recommendation for combating the problem of malingering. "He talks about degrees of intrusiveness that aren't even considered acceptable in the insurance industry today, never mind monitoring millions of people to see if their financial records suggest that they're, in fact, malingering," he observes.

For example, using an ankle bracelet device to monitor the movements of workers' comp claimants to determine if they're actually injured could have a chilling effect on return-to-work programs and undermine the employeremployee contract.

"It would, in effect, amount to a parole system for individuals with insurance claims," Hartwig says.

He's also squeamish about Shiller's suggestion for requiring that multiple documents be submitted to authorities with some degree of regularity to guard against malingering.

In addition, Crockett believes malingering is rare and can be controlled by attending-physician statements, second independent medical evaluations, functional capacity evaluations, offset of earnings from the disability benefit and reasonable accommodation as required under the Americans With Disabilities Act.

"From a risk management standpoint," he says, "I think a better understanding is needed regarding what is required by physicians in terms of evaluating both mental and physical skills, then being able to find disabled individuals. In many cases, union contracts and company cultures make it difficult for that to happen when you have several employees interested in a certain position that is being given to a disabled employee."

Hedging Livelihood

Another direction for expanding business insurance would be for insurers to offer "livelihood" coverage, which Shiller envisions as a major new product. Policy payouts could ease the financial sting for individuals who lose their jobs to automation, overseas competition or other factors.

While a good idea in principle, Hartwig believes livelihood insurance could create perverse economic incentives that exacerbate the industry's moral-hazard problem. For example, people might choose not to work hard--knowing they can fall back on an insurance policy in the event that they don't live up to career expectations.

The book's discussion of livelihood insurance uses a narrow area of DNA technology within the study of biochemistry as an example of a profession involving a high level of uncertainty. Trouble is, the fate of a mere few thousand individuals would hang in the balance in any given year. Hartwig explains that "the initial premise of most insurance is you need a relatively larger number of homogeneous risk."

His conclusion is this: there's simply no need to reinvent the wheel. "There are other mechanisms such as 401(k) plans and all kinds of tax-deferred investments that allow people to accumulate wealth and help them ride out periods of economic uncertainty in their personal lives," he notes.

Crockett agrees, citing unemployment insurance as another adequate short-term solution to the problem.

Retooling Social Security

A third major suggestion from the book involves Social Security advocates spreading risk across the generational divide. The current system indexes Social Security benefits and spares the elderly from risk-sharing.

Shiller's proposal would require changing benefits and contribution formulas within the pay-as-you-go system to appropriately share risks between generations so that working adults aren't stuck supporting children and the retired elderly. For example, retirees would share the pain and pleasure of falling and rising wages among actives.

Crockett sees validity in more closely matching income replacement for those on disability with average employee salaries, though he realizes it's an expensive proposition. Such a plan would come in handy for a Denver Water employee with a wife and two children who became a quadriplegic 15 years ago at age 28. "Salaries have risen tremendously since then," he notes, "but his disability benefit hasn't changed one penny."

"As an industry, I don't want us to sound like sticks in the mud or Luddites," Hartwig says. "In fact, insurers do innovate new products all the time, but it's done against the backdrop of making profitable products within the insurance environment, part of which includes the regulatory mechanism."

Shiller: Author, Scholar and Big-Picture Thinker Doesn't Sweat the Details

Robert J. Shiller, Ph.D., Stanley B. Resor professor of economics at Yale University, is best known as the author of Irrational Exuberance (Princeton University Press, 2000, Broadway Books 2001), which argued that the market boom represented a speculative bubble that was not grounded in sensible economic fundamentals.

Other Shiller books include Macro Markets: Creating Institutions for Managing Society's Largest Economic Risks (Oxford University Press), in which he proposed new risk-management arrangements such as futures contracts in national incomes and real estate, and Market Volatility (MIT Press), a mathematical and behavioral analysis of price fluctuations in speculative markets.

Most of his recent scholarly musings are available as Cowles Foundation Discussion Papers. They include Risk Sharing, Social Security and Risks to Our Incomes in the Long Term, Valuation Ratios and Long-Run Stock Market Outlook and Macros Markets and Financial Security.

Shiller is a research associate of the National Bureau of Economic Research, fellow of the Econometric Society, member of the Academic Advisory Panel for the Federal Reserve Bank of New York, and recipient of a Guggenheim fellowship. He also is co-founder of Case Shiller Weiss Inc., an economics research and information firm, and Macro Securities Research LLC, which promotes securitization of unusual risks.

Shiller, 57, is a Detroit native. His wife of 27 years, Virginia, is a lecturer at the Yale Child Study Center. They have two boys, ages 17 and 21, and plan to spend most of the summer on a small island in Long Island Sound.

--Bruce Shutan

Bruce Shutan, a Los Angeles freelance writer, has been covering the employee benefits industry since 1988.