Private capital has a growing opportunity to make a positive difference to inequality, Swiss Re has said in its latest Sigma report, with the investment community placing greater emphasis on social issues such as diversity, inclusion and equality.
The reinsurer said the S in ESG has previously been an under-represented investment theme and risk factor but said this was now “changing fast”.
“Social bond issuance climbed to new records in 2020 and 2021 as governments tried to mitigate the socio-economic impact of the pandemic,” the reinsurer said.
Social bonds can be used to finance solutions to address specific social issues such as affordable basic infrastructure, essential services, affordable housing, employment generation and socio-economic advancement.
The emergence in 2017 of bonds linked to the UN’s Sustainable Development Goals is expected to help further drive social bond issuance in the coming years.
The International Capital Market Association has published expanded social bond principles that should further attract investors to this emerging asset class as transparency, disclosure and reporting improves.
In its latest Sigma report, Swiss Re highlights that income inequality is rising in advanced economies triggered by factors such as Covid-19 and the conflict in Ukraine.
“Income inequality within countries 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 reinsurer said.
Swiss Re said economic shock events tend to disproportionately affect lower-income households and poverty rates.
“This is happening today as the conflict in Ukraine has exacerbated the current cost of living crisis by pushing up energy and food prices further. The World Food Programme states that currently 276 million people globally face acute food insecurity, more than double the number in 2019.”
The reinsurer said insurance can serve as a powerful tool to promote economic growth and reduce inequality, by supporting the incomes of households that suffer shocks.
“Private insurance providers can work with policymakers to deliver risk transfer public-private partnerships and, with an enabling regulatory framework, can drive innovation in products and distribution to extend the reach of insurance protection. With respect to food security, public-private agriculture insurance programs can play a supportive role,” the report said.
A vital role
Swiss Re said the private insurance sector can play a vital role in reducing inequality, working alongside and in partnership with the public sector.
As new technologies and changing customer preferences shift the insurance distribution landscape, the reinsurer said high mobile telephony penetration in emerging economies offers alternative routes to access insurance for under-served demographics.
Digital distribution can make insurance accessible to those who live in remote areas and may not yet have access to the formal financial sector, Swiss Re said.
“Microinsurance can make affordable and efficient insurance products available to households through unconventional product design, and distribution and claims management processes,” the report continued.
The reinsurer said strengthening resilience by tackling inequality could represent a $700bn premium opportunity for advanced economies.