By Karen Petrou
Much of the work posted so far on this blog centers on the traditional pillars of financial policy: monetary policy and the sweeping post-crisis framework of bank regulation. But, awesome though the Fed’s reach may be and as critical as banking is to income and wealth equality, these financial-policy channels are not the only ones that determine economic equality. In this blog post, we assess another policy channel: health, property-and-casualty, and life insurance. With almost no research in this sector, we pose questions based on what we’ve read and what we think we know based on all our other works. At the least, insurance requires equality evaluation and, quite likely, significant changes so it makes low-and-moderate income and wealth families healthier, readier to retire, better positioned to bequeath wealth to their children, and all around more equal.
What We Know
As with most financial products, insurance purchases break down by economic divides. As a recent model-driven study has shown, poor households have no insurance, middle-class ones appear to have adequate health, P&C and even life policies, and wealthy households largely self-insure themselves, their families, and even their businesses.
Although there is little research on the equality impact of this differentiation, it seems obvious that uninsured households are at the greatest risk of hardship in the event of unexpected expenses that could otherwise be borne by health or P&C insurance. As previously noted, the most recent Fed data show that four in ten adults in the U.S. – roughly 100 million Americans – cannot absorb even a $400 unexpected expense without selling or pawning something, borrowing money, or suffering thereby.
Going beyond day-to-day insurance, it’s clear that the equality value of life insurance is also almost wholly unexamined in economic literature even though it’s particularly critical to inter-generational mobility. The 2018 World Inequality Report shows clearly, as did Piketty’s ground-breaking book, that equality is a cumulative phenomenon. That is, the more a household inherits, the better positioned it is to become still wealthier in comparison to households at the same starting income positions without inherited wealth. It’s for this reason that many equality advocates argue for far higher inheritance taxes.
There is also much data showing that Americans nearing retirement age are all too often dependent only on Social Security, forcing them to scrape by and endangering even years of value built in a home as elders accrue debt to pay household and medical expenses. Sustainable annuity products could be a significant boost to retirement security along with many other policy changes.
What to Do?
To craft a constructive policy response that creates inclusive insurance, we need answers to the following questions:
- How many Americans are under-served by life, health, or property-and-casualty insurance? We know a lot about financial inclusion in terms of traditional bank deposit, payment, and loan services. How many Americans unable to self-insure want equality-critical insurance products? For how many would one or more of these products make a significant difference to household income, wealth, or inter-generational mobility?
- What exactly are equality-critical insurance products? Off the top of my head, I know that one of them isn’t yacht insurance or a scratch-and-dent policy on the Maserati. Are there new forms of universal life with both bottom-line and equality advantages? What about new forms of credit insurance that ensure sustainable home refinancings or lines of credit instead of resort by elders to problematic reverse mortgages?
- Medicare provides a vital health-insurance entitlement which Medicaid does on a needs basis also for younger Americans. Ways to make health insurance more equitable are a thorny challenge, as the Obamacare debate made all too clear. However, that it’s hard doesn’t mean it isn’t necessary. How to?
- Is long-term care insurance really a dead letter? Are there new ways to deliver security as Americans become more infirm? VA protections do this; is there a private-sector option or public-private collaboration that would protect household wealth, advance social welfare, and reduce health-care spending? Failing this, the social-welfare system could break down under the weight of aging baby boomers and increased health risk. Experiments in this area are under way. What do they tell us and how can they advance?
- How can insurance products improve growing retirement-plan participation problems? Annuities were once a staple of defined-contribution plans, but have become less popular in the wake of post-crisis regulation. Is it time to reboot annuities for life-time income security? Can defined-contribution pensions add equality-critical insurance options to reduce their own longevity risk during periods of ultra-low interest rates?
- We already have federal flood insurance – such as it is these days – to protect some vulnerable homeowners. Florida and other states also have limited state-sponsored natural-disaster P&C plans. Are there broader P&C insurance products outside the credit sector (see above) with equality advantages? What about low-cost home-maintenance insurance that saves vulnerable borrowers from predatory repairs and hard-money lenders? Renters’ insurance for low-income households with a municipal backstop? A new plan combining property management and insurance to promote first-time homeownership and keep elders independent as long as possible?
How to make this happen?
In the literature survey conducted for the analysis above, we also took a look at public agencies to see if anyone is contemplating inclusive insurance. In short, no. A survey of the NAIC, IAIS, IMF, World Bank, FSB, and anyone else we could think of came up empty. Clearly, it’s time to broaden the financial-inclusion debate beyond traditional banking to explore inclusive insurance.
And, after study, let’s move on to action. In an earlier blog post and op-ed, I posited an “Equality Bank.” Since then, lots of suggestions have come our way and concrete action is under way in several quarters to build out this idea into a meaningful private-sector initiative. Over to you, insurance industry….