The growing problem of income inequality is having a significant impact on levels of insurance protection, and insurers can play a key role in the solutions, says Swiss Re in a new Sigma study.
The war in Ukraine has intensified the global cost of living crisis by driving up food and energy prices when inflation is already high, the report said.
Many are spending a greater proportion of their income on these basic necessities, risking poverty and poor health. There is less money to spend on insurance coverage, 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 increased in advanced economies over the past four decades.
The report – Reshaping the Social Contract: The Role of Insurance in Reducing Income Inequality – finds that rising income inequality in advanced economies has resulted in a loss of insurance protection of $252 billion (363 billion) in 2019 alone.
This translates to about US$39 billion ($56 billion) in claims paid for property and casualty insurance losses and about US$213 billion ($307 billion) in life insurance benefits.
In Australia, the figure was $3.5 billion ($5 billion) – $1.4 billion ($2 billion) for casualty insurance and $2.1 billion ($3 billion) for life insurance.
The report says countries like Australia, which have seen very strong growth in income inequality, as measured by the Gini coefficient, have seen the slowest growth in insurance penetration.
The Gini coefficient, named after Italian statistician Corrado Gini, measures the distribution of income within the population. A Gini coefficient of zero means perfect equality, while one (or 100%) means maximum inequality.
Australia’s Gini coefficient has increased by 0.5% per year on average over the past 30 years, and its average annual growth in insurance penetration is below 0%.
But the report says the insurance industry has a “vital role” to play in reducing inequality.
It can reduce the cost of insurance for underserved communities through the use of technology, and also bring into play new distribution channels to expand access.
The report recommends extending the use of microinsurance coverage to low-income households.
“Microinsurance can make affordable and effective insurance products available to households through unconventional product design and distribution and claims management processes.”
Swiss Re says reversing the trend of rising inequality in advanced economies “could significantly boost demand for insurance”.
If the Gini coefficient were to gradually decrease by one point over the next decade (roughly the rate at which it has increased over the past three decades), it would add about US$700 billion ($1 trillion) of request for additional insurance.
“Insurance is a powerful tool to promote economic growth, improve resilience and reduce inequality by providing financial protection,” said Swiss Re Group Chief Economist Jerome Haegeli.
“Insurance protection is particularly important for the most vulnerable because, without insurance, low to middle income families can be pushed into poverty in the event of a severe disaster.
“By shifting people’s financial risks and increasing their resilience, the public and private sectors can help reduce inequality.
“Digitalisation also plays a key role in tackling underinsurance, as innovation can make insurance more accessible and affordable for more people.”
Click on here to access the full report.