Actuarial Science series: Tackling global poverty through insurance

Poverty, climate change and ageing populations can create huge risks for society and the insurance sector. In a new series we look at how research in Actuarial Science can help tackle these issues.

Poverty is particularly challenging for many economies around the world, 44 per cent of the global population remains poor, 700 million still live in extreme poverty.¹ At the same time, progress on this issue has stalled due to low-growth, climate extremes, Covid-19 setbacks and fragile nation states.

“When it comes to poverty alleviation, right now we need actuaries, because they are experts at modelling risk. They can also calculate how to manage, finance and account for risk, whether it’s through governments, individuals or the private sector,” explains Séverine Arnold, Professor of Actuarial Science at HEC Lausanne.

Globally, few actuaries are tackling poverty or looking at how humanity can meet the United Nations Sustainable Development Goals (SDGs) through inclusive insurance. This is where poorer households, mainly in developing countries, can get insured — yet, Professor Arnold is one of them.

“We’ve proved that by using theoretical models and tools, insurance can actually help people stay above the poverty line and deal with this risk,” she states.

Along with other academics, Professor Arnold has studied the impact of insurance on poverty dynamics and the role of subsidies from central government, since insurance can help protect the health and livelihoods of low-income people, where farm produce, livestock and other property are insured from the risks associated with natural and manmade disasters.

The researchers found that it is cost effective for the state to support inclusive insurance. They can do this through industry and in the process tackle poverty.²

“If poor households have to pay all the insurance premium themselves, then this constrains their income and they become even poorer. Subsidising insurance is a win-win-win situation. The government has to pay less in social costs, the probability of a household falling into further poverty is reduced, since premiums are affordable and payouts are guaranteed if crops fail or disaster hits. At the same time, the insurance industry benefits, by selling products to a population,” details Professor Arnold.

Their research study uses a sound mathematical model well-known in actuarial science to show that a partnership between the public and private sector is beneficial for all. This model and others developed by actuarial scientists could also be used to effectively tackle other SDGs.

“A significant message from this research is that governments and insurance companies need to cooperate, because it’s better for everyone. The second point is that insurance can be a very useful tool in poverty reduction. Insurance is usually deployed in developed economies, as a tool to protect individuals against risks they cannot face by themselves. However, developing nations need such protection even more!” states Professor Arnold.

The number of people covered by microinsurance products has increased by 70 per-cent over the past three years, reaching 344 million people across 37 countries, according to the United Nations (UN).³ These products have generated over US$6 billion in written premiums. It also represents a significant opportunity for industry, yet a unique approach is needed.

Professor Arnold says: “When insurance is bundled with micro-credits or loans it can also be a powerful tool for poorer communities, especially where people are sceptical about insurance and potential pay outs. If people are aware of those families who have received money from insurance claims there is also more of a positive attitude towards taking out policies.”

She concludes: “There is still so much actuaries can do to help achieve the UN SDGs.”

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