Retirement’s New Timeline

Income Inequality

Managing the underlying threat to sustainable growth

by Dr. Thomas Holzheu

Mr. Holzheu is Chief Economist – Americas for Swiss Re. Visit

Income inequality is negative for social cohesion, economic growth and financial markets. It is also detrimental to most insurance markets, leading to overall lower insurance penetration and reduced household protection. The Swiss Re Institute looks into these trends in the latest sigma report “Reshaping the social contract: the role of insurance in reducing income inequality“.

Income inequality in advanced economies has in general been rising for 40 years. This is as measured by the Gini coefficient, which shows the distribution of income across the population and is the most common statistic used to describe inequality. Inequality in emerging economies is in general higher than in advanced markets but was declining pre-pandemic.

A key driver is globalization which, since the 1990s, has expanded the middle class in economies such as Brazil, China and Russia at the fastest rate ever seen. In contrast, the US middle class has shrunk from almost 60% of the population in the 1980s to less than 55% in 2018.

More recently, the pandemic and the Ukraine war have caused economic disruptions that increased inequality worldwide. Shocks to the economy tend to hit lower income households hardest. The current conflict in Ukraine has put millions of people at risk of food insecurity and falling into poverty. This comes in addition to the strain on inequality caused by the COVID-19 pandemic. Globally, 276 million people face acute food insecurity, more than double the number in 2019, the World Food Program states. Sustained inequality also has negative economic implications: it impacts productivity and aggregate demand, thereby reducing growth. Moreover, inequality erodes trust in institutions and can provoke social unrest too.

The Current Food and Energy Crisis Exacerbates Inequality Globally

The conflict in Ukraine is a humanitarian crisis, resulting in a large-scale death, destruction and displacement of people. The economic fallout is also significant. Global inflation is higher and growth slowing more than previously anticipated as a result of the conflict, and we see now the specter of a recession for the US and for Europe. Current circumstances, including the comprehensive economic sanctions on Russia, further disrupt global supply chains. Commodity prices, especially energy and agricultural, have surged, adding to existing inflationary pressures from supply chain disruptions and the economic rebound from the COVID-19 crisis. Russia and Ukraine account for 12% of all calories traded globally and are among the largest producers of wheat, barley and sunflower oil in the world. Global food markets face challenges in replacing the lost supplies from Russia and Ukraine, which translates into higher prices.

The countries most dependent on Russia and Ukraine for wheat exports are in Africa, the Middle East and some parts of Asia. In Egypt, the world’s largest wheat importer, bread prices rose by 50% in first week of March. Increased costs of energy and fertilizers, important inputs for farmers, further extend the negative impacts on global food supply. Food price spikes can instantly affect progress toward eradicating extreme (income) poverty. A study from the IMF estimates that the global food price spike of 2008 kept or pushed 105 million people into poverty. Another spike in food prices in 2011 pushed 48.6 million into poverty in the short run. Poverty can immediately rise with increased food prices because supply adjustments to rising prices take time and poorer households spend a greater share of their income on food.

The conflict in Ukraine is adding to the already-existing inflationary pressures that resulted from the pandemic. Headline consumer prices inflation has soared to multi-decade highs, for instance at 8.6% in the US (May) and 9.0% in the UK (April), which has eroded the purchasing power of households. US inflation for food stood at 10.1% in May and energy prices were up 34.6% compared to the prior year. High inflation disproportionately affects real disposable incomes of low-income households and the elderly, which is also referred to as “inflation inequality” and reflects that those on lower incomes spend relatively more on necessities.

For example, data for the US and Brazil show that households in the lowest income quintile spend 31% and 27% of their income on food, respectively. For the highest income quintile, the shares are 6% and 7%. Higher food prices coupled with higher household energy bills and fuel costs, are at the core of the current cost-of-living crisis, with lower income households having little cushion to absorb prices rises.

Rising Inequality has a Negative Impact on Life Insurance Demand

Inequality has a significant impact on insurance demand. In advanced economies that have become more unequal since the 1990s, there has been almost no growth in insurance penetration. We find that in advanced economies, household insurance protection would have been about USD 250 billion higher than actual in 2019 had equality remained at 1990 levels. Putting this in the context of protection gaps, we estimate that the rise in inequality in advanced economies since 1990 has widened the natural catastrophe protection gap by about 2.5% of 2019. This suggests that an extra USD 1.7 trillion of assets could have been covered against natural perils, had inequality not risen. Advanced economies’ mortality protection gap is estimated to be 8% larger, equal to USD 5.4 trillion in sums assured as of 2019.

Insurance typically benefits from lower inequality but also mitigates it. Insurance is a powerful tool to promote economic growth and reduce income inequality, by reducing inequality of outcomes for households that suffer shocks...

Our results suggest that in advanced economies life insurance responds negatively to rising inequality. Trends over the past three decades suggest that countries that experienced bigger increases in inequality had lower growth in total insurance penetration. We find a negative and significant relationship between average changes in the total insurance penetration rate (total premiums written as a share of nominal GDP) and changes in income inequality. A 1% increase in the Gini coefficient is associated with a 0.9% decrease in life insurance penetration for advanced markets. Our research finds that if advanced economies’ Gini in 2019 were the same as in 1990, life insurance premiums would be about USD 194 billion, or 8.4% higher than actual. We also modeled the impact on the mortality protection gap. The result was an advanced market mortality protection gap in 2019 that would have been 8% larger (USD 5.4 trillion in sums assured) than if inequality had not increased since 1990.

One explanation for why inequality influences insurance penetration rates is that individuals’ propensity to consume in general and to purchase personal lines insurance changes with their income. We analyzed data from the US Bureau of Labor Statistics to illustrate this point. While individuals in the lowest quintile of income distribution spend on average 20% of their earnings on insurance (including health), those in the highest quintile spend only 5%. Demand for products such as motor and health insurance thus increases less than income, in relative terms, for richer households. These demand characteristics imply that reducing income inequality and strengthening the middle class would boost insurance demand.

Every additional dollar earned by lower tiers of income distribution would translate into larger increases in insurance demand than equivalent dollars earned in the higher income tiers. This suggests a boost in insurance demand for countries that grow their middle class by lifting households out of poverty. The same applies to rising inequality in advanced economies, but with opposite effects: a stagnating middle class is a headwind for the growth of insurance protection and financial resilience of households

Reduced affordability of insurance for low-income households is one expected impact of today’s high-inflation environment. This is because these households already a spend a larger share of their disposable income on food and energy. The rise in food and energy prices are in excess of core inflation and wage gains. As essential items, food and energy purchase is hard to reduce or substitute for. We therefore expect that for low-income households, the cost-of-living crisis will mean reduced insurance demand because risk protection solutions are often considered less “essential”. The scaling back of insurance take-up will only further reduce the financial resilience of society’s most vulnerable.

Insurance can Help to Mitigate Inequality

Insurance typically benefits from lower inequality but also mitigates it. Insurance is a powerful tool to promote economic growth and reduce income inequality, by reducing inequality of outcomes for households that suffer shocks. By providing financial relief when households incur catastrophic expenses, lose assets or the ability to earn income, insurance can serve all segments of society. The protection it provides is especially important for the most vulnerable. Without insurance, low- and even middle-income families can fall (back) into poverty should a severe shock strike. A UK study found that one third of households dropped into a lower income quintile after an unexpected adult death and 20% fell into poverty.

Inequality reduces individuals’ ability to withstand adverse events. Counteracting the financial effects of these events is the core function of insurance. In contrast, when disparities exist in levels of insurance coverage, catastrophes perpetuate poverty and inequality. Poor households are less likely to be insured, have fewer assets and less access to credit with which to rebuild wealth. Empirical research suggests that life insurance may reduce income disparity more than P&C insurance in most countries. Without a well-developed life insurance market, surviving family members are vulnerable. Unmitigated financial shocks to vulnerable households can aggravate or perpetuate housing, health, and educational inequities.

The Need and Opportunity for Policy Action

Addressing inequality can strengthen the social contract and support public trust in institutions. In the short-term, governments need to consider tailored policies to alleviate the current cost-of-living crisis many households face. In the long-term, it is incumbent on both the public and private sectors to take action to tackle inequality. Governments should enact a policy mix that distributes economic opportunities and outcomes more equally.

Policymakers must also promote and use risk transfer mechanisms to distribute risks to incomes more equitably, such as social security systems, transfers to enhance financial inclusion for low-income households, or public-private partnerships (PPPs) to expand insurability. Private insurance plays a role by driving innovation across the insurance value chain to reach less protected communities. In the current high-inflation environment, product design and policy support that support affordability of insurance covers are of particular importance.

Our findings suggest that if policy shifts stimulate a gradual decrease in the Gini coefficient by one point over the next decade, this could add a cumulative USD 700 billion of additional insurance demand in advanced economies.


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