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The Geneva Association - The role of private sector insurance in mitigating social inequality

Source: Asia Insurance Review | Sep 2020

Rising levels of social inequality, in terms of income and wealth, have developed into a ‘defining issue of our time’ (Barack Obama). The COVID-19 pandemic is adding to the challenge as it is likely to have long-lasting economic and social impacts on a global scale, including much-reduced fiscal leeway for governments to address social inequality and poverty going forward. The Geneva Association’s Dr Kai-Uwe Schanz offers some deep insights.
Kai-Uwe Schanz
Close inspection of the relevant data reveals that rising income and wealth inequality is not a universal and ubiquitous trend but needs to be examined at the country level, with domestic policies arguably able to make a difference. The 1980s were a turning point for inequality, with the Reagan-Thatcher reforms in the west and the beginning of liberalisation and deregulation in China and India. 
Consequently, aggregate national wealth and income have grown significantly and inequality between countries has reduced; however, these reforms translated into more unequal distribution within these countries. 
Inequality measures
One of the most established measures of inequality is the Gini coefficient. Figure 1 compares recent levels of income inequality with those recorded one generation ago for a number of countries. Countries above the 45-degree line saw a rise in inequality; countries below experienced falling inequality. 
Income inequality 1990 versus 2015 (based on disposable income or household consumption)
For insurers, one of the most relevant aspects of social inequality is its impact on economic and societal stability and resilience (Figure 2). From a macro-level perspective, inequality affects an economy’s capacity to develop smoothly across its path of potential growth and to minimise income and asset losses resulting from shock events. 
Socio-economic implications of inequality
It is in the insurance industry’s interest to consider products and solutions which contribute to mitigating widening income and wealth parities.
From a ‘micro’ resilience angle, inequality influences the ability of individuals, households and businesses to withstand shock events, based on unequal access to (insurance) protection or an insufficient awareness of it (e.g. due to financial illiteracy). Prominent examples include ‘health inequality’, with implications for life expectancies and health outcomes, and unequal access to disaster risk protection: in the world’s poorest countries virtually all natural catastrophe losses remain uninsured whereas in high-income countries this share (the ‘protection gap’) is below 50%.
Social versus private insurance
Social insurance is widely used to redistribute wealth and income. While private insurance is not designed to address social inequality, its relevance for income and wealth distribution is obvious: Following premature death or disability of the main breadwinner or job displacement, households lose income or the ability to earn income. Such shocks hit the poorest the hardest.
Private-sector solutions also complement redistributive social insurance programmes by providing personalised insurance packages and generally competitive premiums to customers. Especially in developing countries, collecting premiums and submitting and settling claims through innovative ways (e.g. via mobile ‘phones) can expand coverage beyond formal sector employees and include people who would otherwise be left out of social insurance programmes. 
Importance of empirical evidence
While it is intuitively plausible that private insurance can complement public programmes in alleviating the risk of impoverishment and widening income and wealth disparities, there is little research substantiating this. Country-specific research shows that surviving secondary earners without insurance are at significantly higher risk of impoverishment than those with life insurance. Other research demonstrates the wealth- and income-stabilising role of retirement annuities. 
Another major and more recent risk is job displacement. In principle, it could be tackled through (primarily) public-sector solutions, such as wage insurance, which would offer a temporary earnings supplement for workers facing a reduction in wages after re-employment. Generally targeted at workers with low to medium earnings, it narrows the income gap between these and high-wage workers. Although wage insurance has made it to the mainstream political debate (e.g. in the US) its practical relevance remains limited.  
A role for PPP
Private insurance solutions can potentially play a bigger role in complementing public-sector schemes going forward, for example through private-public partnerships, which have a proven track record of kick-starting commercially-viable insurance schemes with private-sector participation. This prospect not only provides commercial opportunities for insurers but also underlines the insurance industry’s role in stabilising economic growth and preventing social unrest and political violence.
Insurers are recommended to consider the following:
  • Proactively engage with the public sector to examine complementary approaches to protection: The post-COVID-19 environment of severe fiscal constraints and citizens’ heightened awareness of the value of life, health and income protection offer a fertile ground for insurers to suggest new forms of involvement and partnerships with the public sector.
  • Accelerate efforts towards product innovation: To serve customer segments better, which are particularly vulnerable to adverse economic shocks, far-sighted insurers do more than simply downscaling traditional products. Innovative responses include parametric policies which are triggered by movements of an index and provide the insured with utmost clarity on payouts. 
  • Harness technology for inclusive insurance propositions, including informal sector workers: Technology can go a long way in promoting the appeal, affordability and accessibility of insurance products. 
  • Promote financial and insurance literacy with a view to alleviating inequality: Various empirical studies demonstrate the role of financial literacy in helping poor people improve their economic well-being, strengthen resilience and reduce poverty. 
Recommendations for policymakers and regulators:
  • Advanced economies: Harness private risk-pooling and transfer mechanisms to ease the growing pressure on public social security schemes. In light of COVID-19, governments should proactively approach private-sector insurers and their associations to explore concerted efforts towards promoting the sustainability of protection schemes further. 
  • Developing economies: Narrowing gaps in social security through private insurance. The high degree of labour market informality and fiscal constraints in many low-income countries pose structural limits to funding and implementing government schemes. Private-sector-driven risk transfer could help expand the reach of protection schemes. 
  • Policies and regulations conducive to financial inclusion: A number of supervisory authorities have committed to the objective of financial inclusion, i.e. to promoting the availability, affordability and equality of opportunities to access financial services such as insurance. For such commitments to be meaningful, regulatory incentives to foster the growth of inclusive insurance are indispensable. A 
The Geneva Association
Dr Kai-Uwe Schanz is deputy managing director and head of research and foresight with The Geneva Association.

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