Priced out and left out: how the insurance market is failing vulnerable consumers

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 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