25 September 2021
A new report from the Institute and Faculty of Actuaries (IFoA) and Fair By Design (FBD) details how those who need insurance the most are often priced out or left out, leaving them unable to access the protection insurance provides. ‘The hidden risks of being poor: the poverty premium in insurance’ exposes the difficulties faced by vulnerable and low income people trying to access insurance and provides practical solutions to ensure everyone has a fair chance of being able to protect themselves and their families.
The research, which includes testimony from people in poverty, found that vulnerable and low income consumers are increasingly quoted higher premiums for insurance, or are refused cover altogether. This can be due to a range of factors, many of which are often outside someone’s control, such as where they can afford to live, or their past medical history. One of the main drivers of the ‘poverty premium’ in insurance is a shift away from a pooling of risk across many different people towards more granular pricing based on an individual’s specific risk factors. This has been made increasingly possible by advances in technology and increasing amounts of data that can be used by insurers.
Consumers and their advocates consulted for the report maintain that they are not in a position to assess whether a high or unaffordable premium, or an insurer’s decision not to offer cover at all, is reasonable or fair. This leaves them in a lose-lose situation – unable to demonstrate a market failure to the government and regulators, and unable to take any legal action.
Questions were also raised about the interaction between the Equality Act and insurance pricing. People with certain protected characteristics such as race, sex (for example, in the case of single mothers) and disability were less likely to hold any insurance, indicating a level of exclusion from the market.
A number of solutions were recommended by stakeholders, including the creation of reinsurance schemes similar to Flood Re and auto-enrolment through employers. Some also called for the end of the monthly payment premium that exists for certain types of insurance.
The IFoA and FBD recommend that:
- The Government should set out a minimum level of protection needed by all, including low income families, for them to remain financially resilient to risks and unexpected shocks – such as Covid-19.
- The Government should also look at how it can facilitate the delivery of a minimum level of protection, through policy interventions such as extending the Flood Re model of insurance, to cover consumers who are priced out or excluded from the market.
- The FCA should support government in this work by undertaking a study into the regulatory outcomes the market is currently delivering for low-income consumers. This study should also consider the interaction between insurance pricing and the Equality Act. This is in line with the recommendation of the Treasury Select Committee in its inquiry into consumers’ access to financial services.
- The Government should work with the FCA and industry to understand the policy changes needed to support and incentivise the sector to develop solutions to address the poverty premium.
Martin Coppack, Director at Fair By Design, said:
“We are all now encouraged to look to the market to protect ourselves and our families from the inevitable ups and downs of life. But what happens if you can’t move to a different postcode - one seen as less risky by insurers? What happens if you have had cancer or another illness in the past? We know that a life or income shock is one of the biggest reasons people get into debt, yet those who can least afford a shock to their finances are being priced out or left out.
“As companies become more able to individually price risk and move away from more mutual forms of pricing we are being left with a two-tier market – one that works for the most healthy and wealthy in society.
“The poverty premium means that households often go without insurance, and they often have to resort to other more costly ways to protect themselves such as credit.
“To level up our communities, regulators, policymakers and industry need to work together to make sure people on low incomes can access the protection they need at a price they can afford.”
David Heath, Chair, IFoA Policy Advisory Group, said:
“As the insurance industry has evolved, pricing for individual risk has had both positive and negative impacts. While lower risk customers have enjoyed lower premiums, vulnerable and low-income households are often considered high risk. These customers are being offered higher premiums, which may be unaffordable. In some cases, they are being refused cover altogether.
“The Covid-19 pandemic has disproportionately affected low-income households and drawn attention to their limited financial resilience in the face of job losses and economic hardship. At a time when adequate protection is more important than ever, this group is facing the most difficulty in securing affordable insurance that would provide a much-needed safety net.
“As Government and industry consider how best to address the challenges highlighted by the pandemic, we would urge them to consider the creation of a more sustainable social and economic system which provides everyone with accessible and affordable insurance. Boosting the resilience of low-income households has the potential to reduce the costs of state welfare while allowing these households to pay bills and spend on goods and services, benefitting their wellbeing and the economy as a whole.”
ENDS
For more information about this press release, please contact:
Fair By Design:
Martin Coppack, Director
m.coppack@barrowcadbury.org.uk
07929 358 472
Institute and Faculty of Actuaries (IFoA):
Sonia Sequeira, Media Relations Manager,
sonia.sequeira@actuaries.org.uk
07525 592198
About Fair By Design: Fair By Design is dedicated to reshaping essential services, such as energy, credit and insurance, so they don’t cost more if you’re poor. Our vision is for a UK where poor and low income people pay a fair price for essential services. People in poverty pay more for a range of products including energy, through standard variable tariffs; loans and credit cards with high interest rates; and higher insurance premiums, through postcodes considered higher risk. This is known as the poverty premium. We collaborate with industry, government, and regulators to design out the poverty premium. Our Venture Fund provides capital to help grow new and scalable ventures that are innovating to make markets fairer. Ascension manages the Venture Fund. The Barrow Cadbury Trust runs our advocacy work on behalf of a group of foundations.
About the Institute and Faculty of Actuaries (IFoA): The Institute and Faculty of Actuaries (IFoA) is a royal chartered, not-for-profit, professional body. We represent and regulate over 32,000 actuaries worldwide, and oversee their education at all stages of qualification and development throughout their careers. We act in the public interest by speaking out on issues where actuaries have the expertise to provide analysis and insight on public and social policy issues. Actuaries working in insurance can be involved at all stages of product development and in the pricing, risk assessment and marketing of the products. Actuaries’ unique insight can facilitate a greater understanding of the causes of the poverty premium within the insurance sector and support the identification of solutions to address it.
Notes to Editor
- ‘The hidden risks of being poor: the poverty premium in insurance’. A report by the Institute and Faculty of Actuaries and Fair by Design. September 2021.
- The project engaged with regulators, civil servants, insurance practitioners and consumer organisations, as well as consumers with ‘lived experience’ of poverty.
- The poverty premium is the extra costs that people on low incomes pay for the same goods and services as those on higher incomes. The Personal Finance Research Centre found that it costs the average low income household an extra £490 a year, but for more than one in ten of these households it costs at least £780. Low income households were defined in the survey as those below 70% of the median household income, to include those on the fringes of the official poverty line. Currently this equates to £17,316 a year, based on the latest Households Below Average Income (HBAI) data.
- The protected characteristics according to the Equality and Human Rights Commission are: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex, and sexual orientation.
- Flood Re is a joint initiative between the UK insurance industry and the UK Government to improve the availability and affordability of household insurance for consumers living in areas at high risk of flooding. Flood Re is a reinsurance company that enables insurers to insure themselves against losses because of flooding. The scheme started operation in 2016 and is a not-for-profit fund, owned and managed by the insurance industry.