Ongoing wage inequality has left households vulnerable in the current cost-of-living crisis due to a fall in protection business, says Swiss Re in a new report.
The reinsurance giant said in its Reshaping the Social Contract: The Role of Insurance in Reducing Income Inequality that decades of rising inequality in advanced market had taken a $252bn toll on insurance protection. It went on to say that income inequality is a threat to the stability of our economies and societies, citing the global unrest over Russia’s invasion of Ukraine.
In a statement, Swiss Re wrote: “Income inequality is not just an issue for developing countries. While many emerging economies have been closing the gap between rich and poor in recent years, income inequality has been rising across advanced economies over the past four decades. [Our] study finds that the rise in income inequality in advanced economies has resulted in about $252 billion of foregone insurance protection in the year 2019 alone, making households more vulnerable to catastrophic losses from unforeseen events.”
According to Swiss Re, income inequality in advanced economies has been rising overall for 40 years, associated with declining life expectancy outcomes in some countries: in the US, the gap in life expectancy between the wealthiest and the poorest 1% has grown to 10-15 years. In the US, as the world’s most unequal advanced economy, the middle class has shrunk from almost 60% of the population in the 1980s to less than 55% in 2018. In contrast, in emerging economies such as Brazil and China, the middle class has grown at the fastest rate ever seen.
The Swiss Re Institute found that total insurance protection in advanced economies would have been about $252bn higher in 2019 if inequality had remained at 1990 levels. This translates to about $39bn of foregone insurance protection in the form of claims paid for property & casualty losses and about $213bn in life benefits.
This inequality, said the reinsurer, could be mitigated effectively by insurance that could provide financial relief to homes hit by shocks.
Jerome Haegeli, group chief economist at Swiss Re: “Insurance is a powerful tool to promote economic growth, improve resilience and reduce inequality by providing financial protection. Insurance protection is particularly important for the most vulnerable because, without insurance, low- and even middle-income families can fall into poverty in the event of a severe disaster.”
He added: “By shifting financial risks away from individuals and increasing their resilience, the public and private sectors can work towards reducing inequality. Digitalisation also plays a key role in addressing underinsurance as innovation can make insurance more accessible and more affordable for more people.”
The report says that not only is insurance a powerful tool to promote economic growth and reduce inequality, but that doing so should be a priority for the public and private sectors.
The authors write: “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[1]income individuals’ risk protection, or public-private partnerships (PPPs) to expand insurability. Private insurance has a role by driving innovation to reach less protected communities. In the current high-inflation environment, product design and policy support that promote affordability of insurance covers are of particular importance.”
