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Tipping the scale? – Intergenerational imbalances on the rise

The lockdown measures imposed to contain the COVID-19 outbreak will likely lead to a short, sharp recession.

The shock has also, however, accentuated longer-term structural problems in many markets. In particular, the negative economic consequences will impact younger generations for years to come: millions of working age people face a slump in incomes and even unemployment. And this will increase pressures on intergenerational social contracts.

Millennials born between 1980 and 2000 were still kids, teenagers or young adults at the time of the global financial crisis in 2008–09. Post crisis, many had to suffer austerity and unemployment. This generation built up debt from spending on education, a supposed investment in their future careers. Instead, many have experienced precarious professional development, moving from one temporary job to another. Not able to afford independent living, they have also tended to stay at home with parents for longer. The risk of becoming a “lost generation”1 remains, with still high rates of youth unemployment in many markets.2

Millennials are now at the beginning or in the midst of their professional lives. They may have children or plans to buy (or build) a house. They are the textbook example of a large insurance market. However, that market is set to shrink significantly in the near term. The COVID-19 outbreak and economic downturn means household budgets are under pressure.3 It remains to be seen how this affects insurance spending (see SONAR 2020 report  “The pivot East”).

The COVID-19 crisis is also bringing issues around intergenerational solidarity and justice to the fore.

With more baby boomers reaching retirement age, in many countries the size of elderly population requiring support - emotional, physical and financial – is growing. Data from the OECD shows that there will be a surge in the ratio of older people (65+) per working age person (20–64) by 2060 in all members of this club of mostly rich countries.4

Some mature markets, particularly in Europe, face the prospect of “Japanification”, a long-running period of economic inertia. Over the last 30 years, as Japan’s population has aged, the economy has been characterised by low growth, low inflation, and low interest rates.5 Such a scenario could have significant ramifications in democracies where pensions are effectively claims on the future earnings of younger generations. Changing this system would require reform against the interests of the aging majority. On the other hand, a political stranglehold of elder voters could nurture frustration and anti-democratic sentiment among the younger generations facing ever-growing financial burdens in times when they are unable to sustain wealth accumulation. A frustration that could build and explode.

Potential impacts

  • A growing life insurance protection gap: the ageing population and “starved” millennials will likely mean more requirement to insure longer lives, at the same time as there being reduced demand for insurance.
  • Insurance companies will need to find ways of distributing insurance at significantly lower prices while also ensuring adequate pricing of risks to be able to pay for future claims.
  • The impact of low growth and low interest rates could lead to lower premium income, lower guaranteed returns (especially in the life business), assets moving towards higher returns, and changes in offered products.
  • Millennials’ frustration and distrust in governmental authority could foster social unrest, with possible property damage and other insurance impacts.
  • A growing debt trap may encourage more risky investment behaviours, increasing financial market risk, including for institutional investors like insurers and pension funds.

References

1. See “Generation Lost?” Global Risks 2014, World Economic Forum, 2014
2. From latest available figures (2019) the international Labor Organisation (ILO) reported 13.6% youth unemployment rate globally, with considerable regional variation, from under 9% in North America up to over 30% in Northern Africa.
3. ILO experts see young workers, and particular young women, as most affected by Covid-19 fallouts. They are more affected by lay-offs and automation than older cohorts. The young also more often work in the informal economy and in temporary employment, often on low pay and without social protection. S. Puerto and K. Kim, “Young workers will be hit hard by COVID-19’s economic fallout”, iloblog.org 15. April 2020. https://iloblog.org/2020/04/15/young-workers-will-be-hit-hard-bycovid-19s-economic-fallout/
4. D. Rouzet, D., et al. (2019), “Fiscal challenges and inclusive growth in ageing societies”, OECD Economic Policy Papers, No. 27, OECD Publishing, Paris 2019, https://doi.org/10.1787/c553d8d2-en p. 10 Figure 2.
5. See sigma No 6/2019, Swiss Re

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