Swiss Re Institute: We expect the "S" in ESG to play a bigger role in investment decisions in the future.



Reshaping the social contract: the role of insurance in reducing income inequality

Income inequality within countries is negative for social cohesion, economic growth and financial markets. It is also detrimental to most insurance markets, leading to overall lower insurance penetration and reduced household protection, our research finds.

Income inequality in advanced economies has in general been rising for 40 years. This is as measured by the Gini coefficient, which shows the distribution of income across the population and is the most common statistic used to describe inequality.  Inequality in emerging economies is in general higher than in advanced markets, but is declining. A key driver is globalisation which, since the 1990s, has expanded the middle class in economies such as Brazil and China at the fastest rate ever seen. In contrast, the US middle class has shrunk from almost 60% of the population in the 1980s to less than 55% in 2018. 

In terms of immediate effect, economic shock events tend to disproportionately affect lower-income households and poverty rates. This is happening today as the war in Ukraine exacerbates the current cost of living crisis by pushing up energy and food prices further. Globally, 276 million people face acute food insecurity, more than double the number in 2019, the World Food Programme states.

Sustained inequality also has negative economic implications: it impacts productivity and aggregate demand, thereby reducing growth. Inequality erodes trust in institutions and can provoke social unrest too. Looking ahead, we see structural trends like deglobalisation, digitalisation and climate change shaping inequality over the longer-term. We also expect the "S" in ESG, for social issues, to play a bigger role in investment decisions in the future.

 Insurance is a powerful tool to promote economic growth, improve resilience and reduce inequality. Without insurance protection, low- and even middle-income families can fall into poverty in the event of a severe disaster. By shifting financial risks away from individuals and increasing their resilience, the public and private sectors can work towards reducing inequality.

- Jérôme Jean Haegeli, Group Chief Economist, Swiss Re

Inequality has a significant impact on insurance demand. In advanced economies that have become more unequal since the 1990s, there has been almost no growth in insurance penetration. We find that in advanced economies, household insurance protection would have been about USD 252 billion higher than actual in 2019 had equality remained at 1990 levels. Putting this in the context of protection gaps, we estimate that the rise in inequality in advanced economies since 1990 has widened the natural catastrophe protection gap by about 2.5% of 2019. This suggests that an extra USD 1.7 trillion of assets could have been covered against natural perils, had inequality not risen. Advanced economies' mortality protection gap is estimated to be 8% larger, equal to USD 5.4 trillion in sums assured as of 2019.

Addressing inequality can strengthen the social contract and support public trust in institutions. In the short-term, governments need to consider tailored policies to alleviate the current cost-of-living crisis many households face. In the long-term, it is incumbent on both the public and private sectors to take action to tackle inequality. Governments should enact a policy mix that distributes economic opportunities and outcomes more equally. Policymakers must also use risk transfer mechanisms to distribute risks to incomes more equitably, such as social security systems, transfers to enhance low-income individuals' risk protection, or public-private partnerships (PPPs) to expand insurability.

Private insurance also plays a role, by driving innovation to reach less-protected communities. In the current high-inflation environment, product design and policy support that support affordability of insurance covers are of particular importance. Agro insurance is a key tool to mitigate the elevated threat of food insecurity. Our findings suggest that if policy shifts stimulate a gradual decrease in the Gini coefficient by one point over the next decade, this could add a cumulative USD 700 billion of additional insurance demand in advanced economies.

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