Off balance: rising income inequality equals falling insurance cover
The growing problem of income inequality is having a significant impact on insurance protection levels, and insurers can play a key role in solutions, Swiss Re says in a new Sigma study.
The war in Ukraine has intensified the global cost of living crisis by pushing up food and energy prices when inflation is already high, the report says.
Many are spending a greater proportion of their income on such essentials, risking poverty and ill health. There’s less money to spend on insurance cover, which means greater exposure to natural disasters or other economic shocks.
And if you thought countries like Australia were immune – think again. Income inequality has been rising across advanced economies for the past four decades.
The report – Reshaping the social contract: the role of insurance in reducing income inequality – says rising income inequality in advanced economies resulted in $US252 billion ($363 billion) of foregone insurance protection in 2019 alone.
This translates to about $US39 billion ($56 billion) in the form of claims paid for property & casualty (P&C) losses, and about $US213 billion ($307 billion) in life benefits.
In Australia, the figure was $US3.5 billion ($5 billion) – $US1.4 billion ($2 billion) for P&C and $US2.1 billion ($3 billion) for life.
The report says countries like Australia which have experienced very high growth in income inequality, as measured by the Gini coefficient, have experienced the slowest growth in insurance penetration.
The Gini coefficient, named after Italian statistician Corrado Gini, measures the distribution of income across population. A Gini coefficient of zero means perfect equality, while one (or 100%) means maximum inequality.
Australia’s Gini coefficient has been rising at 0.5% per year on average over the last 30 years, and its annual average growth in insurance penetration is below 0%.
But the report says the insurance industry has a “vital role” to play in the drive to lower inequality.
It can lower the cost of insurance for under-served communities through the use of technology, and also bring new distribution channels into play to widen access.
The report recommends extending the use of microinsurance coverage for low income households.
“Microinsurance can make affordable and efficient insurance products available to households through unconventional product design, and distribution and claims management processes.”
Swiss Re says that reversing advanced economies’ rising inequality trend “could significantly boost insurance demand”.
If the Gini coefficient decreased gradually by one point over the next decade (roughly the pace it has increased over the last three decades) then it would add about $US700 billion ($1 trillion) of additional insurance demand.
“Insurance is a powerful tool to promote economic growth, improve resilience and reduce inequality by providing financial protection,” Swiss Re Group Chief Economist Jerome Haegeli said.
“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.
“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.”
Click here to access the full report.
