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The hidden risks of being poor

Policy Manager, Faye Alessandrello, discusses the collaborative research being undertaken by the IFoA and Fair By Design into the poverty premium in the insurance sector.

Policy Manager, Faye Alessandrello

In today’s marketplace, we’re told the importance of being a savvy shopper and of shopping around to get the best deal. However, this is a luxury that not all can enjoy. Vulnerable households, including those on low incomes, are more likely to receive a bad deal in consumer markets.

On average, low income households in the UK pay an additional £490 a year on essential goods and services such as energy, loans, and insurance. This is referred to as the poverty premium and describes the extra costs incurred by low income houses when purchasing the same essential goods and services as households on higher incomes.

Examples of the poverty premium include the additional costs incurred by the use of pre-payment meters for electricity which, on average, cost a third more than paying by Direct Debit, or having to pay more for daily bus fares if you can’t afford the upfront cost of a monthly pass.

In the UK, approximately 14 million people are in poverty in the UK. This equates to more than one in five of the population, including 4 million children and 2 million pensioners – up by 400,000 and 300,000 respectively over the past five years. These figures are expected to increase in light of the job losses experienced during the COVID-19 crisis. The number of people out of work and claiming work-related benefits in the UK increased 23% to 2.8 million last month. Dave Innes, Head of Economics at the Joseph Rowntree Foundation, stated, “the risk of poverty is particularly high for workers in sectors like hospitality and retail where people are more likely to be on low wages and in insecure work.” Solutions to address the poverty premium are needed now more than ever.

The poverty premium in the insurance sector

Insurance provides people with protection against financial hardship and helps them to build resilience in the face of financial shocks such as ill health,  a car accident, a home burglary or a household appliance, such as a fridge, breaking down. However, low income households are less likely to have insurance to protect them from these risks. For example, 60% of households on £15,000 or less have no contents cover. Often, the cost of the poverty premium acts as a barrier to purchasing insurance. Insurance is often more expensive for low income households for a range of reasons including being seen as higher risks or being located in areas seen as higher risk. They are also less likely to switch so end up paying a loyalty penalty, and are more likely to pay by more expensive methods. Research by the University of Bristol found that the average premium for car insurance by monthly direct debit, rather than paying annually, was £81 per year.

When faced with these financial shocks, low income households are also likely to have a reduced capacity to replace or repair uninsured goods or belongings - over 7 million adults in the UK have less than £1,000 in savings. Often they may have no other choice than to use solutions that are more costly in the long run, such as credit.

IFoA and Fair By Design Research

Fair By Design (FBD) is dedicated to reshaping essential services, like energy, credit and insurance, so they don’t cost more if you’re poor. FBD collaborates with regulators, government and businesses to design out the poverty premium and provides capital to help grow new and scalable ventures to innovate the market.

The Institute and Faculty of Actuaries (IFoA) and FBD are collaborating on research project which seeks to greater understand the causes of, extent and impact of the poverty premium in the insurance sector. The final report, to be published later this year, will articulate the key problems experienced by low income consumers and their causes. It will also make recommendations for regulators, policymakers and industry for further work on this issue.

The IFoA acts 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. Their unique insight will facilitate a greater understanding of the causes of the poverty premium within the insurance sector. It is anticipated this understanding will also support the identification of solutions to address it. This research also fits with the broader themes of IFoA’s Inclusive Insurance bulletin series which was launched earlier this month.

Martin Coppack, Director at Fair By Design, said of the collaboration, “I am excited to be working with the Institute on this worthwhile initiative. Never has there been a more appropriate time to make sure everyone has access to the protection they and their families need.  The irony is that those who need protection the most are often the least able to afford it. We have to find a better way. ”

To inform the research we will be engaging with industry experts, consumers groups, regulators and IFoA members. If you are interested in discussing your views on this issues, please feel free to contact policy@actuaries.org.uk.