A new study by the Swiss Re Institute warns that rising inequality in advanced markets exacted a $252bn toll on insurance protection in 2019, making households more vulnerable to catastrophic losses from unforeseen events. Another key study finding is that income inequality within countries is negative for social cohesion, economic growth and financial markets.
The institute’s latest sigma report, Reshaping the social contract: the role of insurance in reducing income inequality, takes a close look at income inequality across the globe and reflects on how changes in inequality levels are impacting life and non-life insurance penetration in advanced and emerging markets alike. The report will resonate with insurers and reinsurers placing covers in Africa, especially given persistent inequality in the continent’s most-advanced insurance market.
South Africa has consistently featured at the top of the list of most unequal economies globally, with a Gini coefficient above 0.6 since the 1980s. According to Wikipedia, the Gini coefficient “is a measure of statistical dispersion intended to represent the income inequality or the wealth inequality within a nation or a social group”. Readers should note that the Gini coefficient is not a measure of absolute poverty, but rather a measure of the divide or gap between the rich and poor. South Africa sat atop the Income Inequality by Country 2022 table published mid-May 2022 on worldpopulationreview.com, where it featured alongside a list of its sub-Saharan Africa (SSA) peers, including Namibia (2nd), Zambia (3rd), Mozambique (4th), Botswana (5th), Angola (6th) and Zimbabwe (9th).
The Swiss Re sigma report also commented on income inequality and poverty in the context of the Russia-Ukraine conflict and the world’s ongoing efforts to limit the long-term impact of climate change by reducing carbon emissions, among other factors. “The war in Ukraine has intensified the global ‘cost of living’ crisis by pushing up food and energy prices when inflation is already high; this means that those who spend a higher percentage of their earnings on food or fuel, especially low-income households in emerging markets, are at risk of poverty and ill health,” noted the media release accompanying the report launch.
Guido Fürer, group chief investment officer of Swiss Re, pointed to a growing opportunity for private capital to make a positive impact on inequality. “As a risk taker and investor, the insurance industry is in a key position to drive the profound changes needed to improve resilience,” he said. Primarily, this impact would derive from a greater focus on social aspects such as diversity, inclusion and equality as part of the global theme towards environmental, social and governance (ESG) focused investment.
Sasria SOC, a state-owned special risks insurer operating in South Africa, has first-hand experience of the consequences of inequality-related social discontent. In July 2021, parts of KwaZulu-Natal and Gauteng saw unprecedented looting and rioting of private sector goods and property including logistics centres, retail outlets, shopping malls and warehouse complexes. All told, the country suffered more than ZAR50bn in economic losses, with Sasria since picking up damages and loss-of-profit claims totalling ZAR37bn. As the Swiss Re report noted: “Inequality calls into question the concept of the social contract, by challenging its intended fairness across all members of society, opening the door to episodes of civil disobedience, vandalism, rioting and looting.”
Inequality presents a bit of a double-edge sword in that it contributes to social catastrophes, such as the aforementioned looting and rioting, and also leaves low- and middle-income families vulnerable to losses consequent both natural and manmade disasters. “Insurance is a powerful tool to promote economic growth, improve resilience and reduce inequality by providing financial protection,” noted Jerome Haegeli, group chief economist of Swiss Re. “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.”
The Russia-Ukraine conflict risked adding fuel to the global inequality and poverty fires by accelerating global food prices. According to Swiss Re, “countries with higher income inequality and lower levels of economic resilience are at greater risk of food insecurity because a larger share of household income is spent on food”. There is a genuine fear that higher energy and food costs resulting from the Ukraine war will have a significant impact on Africa, where many populations exhibit extreme levels of poverty.
The report also raised concerns that structural trends such as climate change, deglobalisation and digitalisation would exacerbate inequality and poverty in emerging markets. It read: “Climate change will likely make the world more unequal due to its disproportionate impacts on emerging economies, for two key reasons: first, emerging economies are more dependent on agriculture and natural resources, leaving them more exposed to climate change and extreme weather events; [and] second, these countries have fewer resources to adapt to climate change and take mitigating measures than wealthier countries.”
This partly explains the record financial assistance packages announced by developed economies following the COP26 climate change conference. These packages were aimed at assisting emerging countries, especially in Africa, to achieve climate change related goals. For example, in November 2021 four western governments plus the European Union pledged $8.5bn to accelerate South Africa’s energy transition. This amount was in addition to an estimated $100bn per annum in investment ‘promises’ from developed countries to Africa between 2022 to 2025.
The latest Swiss Re sigma study reminded industry stakeholders that insurance could be an effective tool for mitigating inequality: “In the current high-inflation environment, product design and policies that promote insurance affordability are particularly important.” The reinsurer suggested that the industry leverage emerging technologies to create more affordable distribution channels and expand insurance coverage. Microinsurance and parametric insurance were held up as solutions with the potential to reduce inequality and promote inclusive growth.
“The public and private sectors must work together to address inequality and strengthen the social contract,” concluded Swiss Re. “In the short term, governments need to consider tailored actions to alleviate the current cost of living crisis many people are facing… in the long term, governments can develop a policy mix that distributes economic opportunities and outcomes more equally and ensures that income risks are shared equitably.”
Governments that ignore the burning social issues could face severe consequences as illustrated by the ZAR50bn economic hit suffered by South Africa last year. The country sits atop an inequality- and poverty-filled powder keg that will not withstand the sparks of high unemployment, inflation and stagnant economic growth for long.