How the insurance industry can contribute to inclusive growth

The S in ESG, referring to social issues, is firmly in the spotlight right now, with a strong focus on shaping a more equitable, just and resilient society.

The wide and often intangible remit of the "S" category had, until relatively recently, made it a tricky investment proposition. In particular, there is one measure where we have failed to make much progress which, I would argue, should be a top priority to tackle for insurers, governments and the private sector alike: income inequality.

The reality for people living in advanced economies is that income inequality has in general been rising for the past four decades. Inequality in emerging markets is typically even higher than advanced markets, but has generally come down over that period.

There are also a number of bigger, often structural trends playing into this scenario, including the global pandemic and climate change, which are likely to increase inequality due to a disparate impact on lower-income groups.

There are some obvious immediate impacts of this income inequality. People with less money are less able to cope with economic shocks. Right now, the war in Ukraine is driving up prices and exacerbating a cost-of-living crisis that’s being experienced by many. The World Food Programme estimates the number of people facing acute food insecurity has doubled to 276 million since 2019.

Less immediately apparent is the impact inequality has on security and resilience. This can be seen by the significant impact inequality has on insurance demand. Advanced economies that have become increasingly unequal since the 1990s have almost no growth in insurance penetration. According to the new sigma 3/2022 study from the Swiss Re Institute, if equality in 2019 had remained at 1990 levels, household insurance protection would have been more than USD 250 billion higher .

Looking at one area of insurance, this growing inequality since 1990 means the protection gap for natural catastrophes is 2.5% wider. Or put another way – an extra USD 1.7 trillion of assets could have been protected against natural perils if inequality hadn’t risen.

Meanwhile, advanced economies’ mortality protection gap is 8% larger – or USD 5.4 trillion in assured sums as of 2019.

Less easy to measure is the impact addressing income inequality can have on strengthening the social contract and boosting trust in institutions. This in turn leads to greater resilience, social cohesion and stability, avoiding the social unrest that can occur when there are high levels of income inequality.

These examples clearly state the case for reducing inequality in order to strengthen resilience of societies and economies.

For governments, there are three target areas to focus on when forming policies to support inclusive growth. These are:

• pre-working life (including areas such as primary education and vocational training)
• participation in the economy (including apprenticeships, for example)
• redistribution of economic outcomes (covering areas like the social security system)

Alongside measures such as modernising social security, other effective policy levers include subsidising low-income households’ use of insurance and working with the insurance industry to build regulatory frameworks that enable the insurance market to develop and innovate.

It’s worth noting that societal structural reforms typically have a positive impact on economic growth and living standards as well. The Euro area’s NextGenerationEU Covid recovery package, for example, is tied to country-specific structural reform initiatives. In China, the government has made significant progress in opening up its economy and on the green transition. And the USD 1.2 trillion infrastructure bill in the US is also very wide reaching.

Tackling income inequality is also a job for the private sector – and the re/insurance industry also has a role to play.

Our interest is to work with governments in order to expand insurability, broaden access to insurance protection, and supplement social security systems with private sector-based solutions. An example of this already in practice is an insurance programme called Huimin Bao endorsed by local city governments in China. Working in collaboration with insurers, the system expands health insurance coverage, complementing and extending existing social security packages.

Other examples include government-run risk carriers for residual (hard-to insure) risks, like the FAIR property insurance and motor residual market programmes in many US states.

Re/insurers are also large institutional investors. In that capacity they can work with the public sector to help fund sustainable infrastructure which in return can help foster productivity growth. This includes assisting in the transition to greener and more sustainable energy by insuring renewable energy projects and infrastructure, both during construction and in operation. Social bonds are a new frontier in ESG investing; the market is still nascent though and needs to grow in volume.

Microinsurance coverage, especially when delivered through digital channels, could also be a solution, creating affordable and efficient products for low-income households using unconventional design, distribution and claims management.

For these reasons, insurance is fundamental in the global efforts to tackle inequality. A closer eye from the re/insurance sector to the wide-reaching economic and societal benefits of levelling out inequalities will go a long way towards achieving a more resilient, stable and inclusive society.