Insurance provides households with protection against financial hardship in the face of income shocks such as unemployment, illness, and bereavement. However, as a result of the poverty premium in insurance, vulnerable and low-income consumers often cannot afford, or are altogether excluded from, insurance that would provide protection from such shocks.
The IFoA, together with Fair By Design (FBD), have produced a joint report, The hidden risks of being poor: the poverty premium in insurance, exploring the prevalence, key drivers and impact of poverty on vulnerable consumers. The report has been informed by extensive engagement with regulators, civil servants, insurance practitioners, and consumer advocates, as well as people with lived experience of poverty. It makes recommendations for the Government aimed at improving access to insurance for these consumers.
The report covers:
- The prevalence of the poverty premium in insurance, which, in recent years, has evolved to become the biggest contributor to the poverty premium in essential services in the UK.
- The lived experience of poverty premium and the impact this has on experiences with, and perceptions of, a range of insurance products.
- The shift away from broad risk pools toward more granular pricing based on an individual’s specific rating factors (i.e. their risk characteristics) which have created a range of negative outcomes for vulnerable consumers including being more likely to be offered a higher premium, or be refused insurance altogether, as a result of the higher risk they present.
- Differing views about what is meant by ‘fairness in insurance’ and the need for a broader discussion about what ‘fair’ and acceptable outcomes look like for consumers.
- Concerns were raised by consumer advocates about the interaction between the Equality Act 2010 and insurance pricing.
- Alternative approaches and products that were recommended by stakeholders to address the poverty premium, including the creation of Government-agreed reinsurance schemes, similar to Flood Re, such as Health Re or Postcode Re.
We make the following recommendations for Government and others within the report:
- The Government determines a minimum level of protection needed by all, including low income families, in order for them to remain financially resilient to specific risks and unexpected shocks.
- In line with the recommendation of the Treasury Select Committee, 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 the Equality Act and insurance pricing.
- The Government should look at its role in facilitating the delivery of a minimum level of protection through the use of social policy interventions, such as extending the Flood Re model of insurance for different insurance product lines, to cover low income and vulnerable consumers who are priced out, or excluded from the market.
- The Government works with the FCA and industry to determine what changes are needed within the public policy and regulatory environment to support and incentivise the insurance sector to develop and deliver innovative solutions to address the poverty premium.
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