If you ask people in the industry to justify recent financial innovations, they will explain that they allow risks to be managed more effectively. Yet if you asked people in the street whether recent developments in financial markets had made them feel more secure, they would assume you had taken leave of your senses. The most serious economic crisis of modern times is a direct result of instability emerging from global financial markets.
Individuals can use financial markets to provide protection against risks such as car crashes and house fires. But life cover has traditionally been bundled with savings products, with the recent outcome that savers have been poorly served and young parents rarely have the cover they need. Defined benefit pension schemes are fast disappearing, so that the investment risk associated with saving for retirement has been largely transferred to households.
The principal financial risks faced by individuals are loss of employment, breakdown of relationships and illness. The practices of many large employers once effectively insured workers against the risks of the business cycle, but lifetime employment is increasingly a thing of the past. You can only buy unemployment and redundancy insurance in small amounts on unattractive terms. You cannot buy divorce insurance at all – this is a textbook illustration of the moral hazard problem. The only advanced country that has not effectively socialised healthcare is moving rapidly towards doing so, and greater public funding of long-term care is now widely discussed.