Fair By Design’s latest lived experience film highlights this injustice through three stories looking at energy, car insurance and access to cash. These stories show that people in poverty are charged more for essentials because of the way they pay for them.  

The film builds on work on the poverty premium in payments, and how people in poverty can access fair and flexible methods of payment. You can read a full paper on the issue here. 

Ofgem also said it had not made a final decision on the extra costs for people who pay for energy when they receive their bill. It plans to continue to explore how to tackle this issue and will publish a consultation by the end of the year. If implemented, a reduction or end to this extra cost would happen from April 2025.

Maria Booker, Head of Policy, Fair By Design, said:

“This is a big win for people on low incomes. Today’s announcement introduces a lasting solution. We welcome recognition from the regulator that people on low incomes should not pay more for their energy.

“We also welcome Ofgem’s intention to bring down the premium for paying on receipt of bill, even if not as soon as we had hoped.

“But the extra cost for those who pay when they receive their bill still exists. We want to see this completely eliminated and will continue to push hard for this change to happen.”

Read the full release on Fair By Design’s website.

In our consultation response, we set out a wide range of policy solutions to create a fairer domestic energy market, emphasising the need for Ofgem and the Government to prioritise the interests of low-income consumers. This includes: 

• Introducing an energy social tariff as soon as possible. There is an ongoing affordability crisis in energy. Prices are forecast to remain significantly above their pre-crisis levels for many years to come. The Government needs to urgently honour its commitment to consult on introducing long-term bill support for those least able to afford their energy.
• Reforming standing charges as they are too high. Ofgem should look to recover the fixed costs of the energy system in a fairer way. 
• We would like to see an end to premiums for different methods of payment, particularly when those methods of payment are disproportionately used by those on a low income (“poverty premiums”). 
• We would also like to see regional differences in energy prices abolished. People on low incomes have told us that they want the energy system to be less complicated and fairer.  

Our full consultation response notes in further detail our policy asks.   

New analysis by Age UK has revealed that 2.2 million households would not be living in fuel poverty this winter – a reduction of around 65% – if the Government had implemented an energy social tariff to help the most vulnerable energy users in society. 

Despite repeated promises from the Government to consult on an energy social tariff they have failed to follow through on this commitment, letting down millions of people in fuel poverty who are still in desperate need of support. 

A Coalition of Charities, Age UK, Scope, Fair By Design, Mencap, MND Association and Sense, warn that the cost of living crisis is still adding huge pressures to household finances, with millions facing the dilemma of how they’re going to pay their energy bills this year. 

Read the rest of this release on Fair By Design’s website.

The plan also includes commitments in other areas Fair By Design campaigns on, such as flexibility in payments; access to cash; exploring the need for alternative sources of credit for households, such as financing from community development finance institutions; and regulating Buy Now Pay Later. 

Martin Coppack, Director, Fair By Design, said:

“I’m incredibly pleased to see that the Labour Party has listened to Fair By Design and our partners’ calls for a national financial inclusion strategy. A strategy would give any party who wins the election the chance to make meaningful change to the lives millions of people who are excluded from financial services in the UK, or who are charged more for being poor.

“Labour’s plan acknowledges the link between financial exclusion and poverty premiums, which is a great start. Any future strategy will need a clear commitment to end poverty premiums.

“I call on all parties to make tackling the poverty premium part of their manifestos.”

Read Fair By Design’s election manifesto.

Authority (FCA) is sending strong signals that it will tackle premium finance, with its Director of General Insurance Matthew Brewis effectively calling it a poverty premium this week:

“It is a tax on being poor. Those who are paying monthly are subsidising those who can afford to pay annually.”

It’s not the first time that Matthew Brewis has talked about the need for action on premium finance being used to charge people more for paying monthly. When we launched our latest report on insurance poverty premiums with the Social Market Foundation (SMF) last spring, Matthew said that the FCA had been engaging CEOs on premium finance. He said that the FCA expected the prices charged for paying monthly to be proportionate with the credit risk for the cost of providing that service. Matthew questioned why some consumers experienced such high rates, saying it was not “really apparent why’s it’s appropriate for APRs at 30% or above charged to consumers”. You can watch him here:

The Association of British Insurers, in turn, said they agreed on the need to collaborate with Treasury and the FCA on some of the issues identified in our report. 

The Shadow City Minister Tulip Siddiqi MP spoke at the same launch event and agreed action was urgently needed. Tulip pledged to make the case for any incoming Labour Government to prioritise tackling how expensive it is for people on low incomes who pay monthly for their insurance: “Too often it’s just more expensive to be poor, which is not how we want the country to be run”.   

What is the impact of premium finance on people on low incomes?

Our latest research with the SMF shows that over half of people in poverty are finding it difficult to pay for their insurance during the cost-of-living crisis – leading some to give up insurance as they prioritise food and energy bills.  

This research described how paying monthly for car insurance can cost £160 more a year than paying everything upfront. These extra costs have a knock-on effect on take-up amongst people on low incomes. Zahada, who has lived experience of this issue, explains how she had to pay monthly for her daughter’s car insurance because they didn’t have all the money to pay upfront. That has cost them an extra 10%, or around £200. You can hear directly from her in this video: 

We want to see action 

We have an opportunity to end this poverty premium for good. There are strong signals from the regulator and, we believe, increasing willingness from industry to collaborate. In an election year, we are calling for political parties to make addressing the poverty premium part of their commitments. We want to see a UK where everyone pays a fair price for essential services and where it doesn’t cost more to be poor. 

Background

In July 2023, the Government brought in temporary measures to end the premium that pre-payment meter (PPM) customers paid for their energy, whilst tasking Ofgem with finding a way of ending the PPM premium permanently when the Energy Price Guarantee comes to an end in April 2024. This consultation is part of that process.  

Ofgem has taken the opportunity to look at the premium paid by customers who pay on receipt of bill (known as standard credit) as well as the premium paid by PPM customers. 

Our response

We want to see the poverty premium in energy ended. In its consultation, Ofgem set out three options, and we support option three. Option three not only makes having a pre-payment meter the cheapest method of payment, but also significantly reduces the standard credit premium (option 3 would reduce the standard credit premium to £62).  

We still believe a standard credit premium of £62 is too high but recognise that it is significantly better than both other options included in the consultation. 

Our full consultation response notes in further detail our policy asks.  

The default tariff cap (‘the cap’) came into force on 1 January 2019. The cap ensures that default tariff customers pay a fair price for their energy that reflects the efficient underlying cost to supply that energy.

Given growing levels of energy debt Ofgem has been carefully monitoring the evolution of debt-related costs relative to price cap allowances.

Ofgem has seen evidence of a gap between costs and the existing cap allowance in cap period 8-10a (April 2022 – June 2023). Ofgem is therefore issuing a policy consultation on whether they should adjust the price cap to account for these deviations between costs and allowance. Ofgem considers that it is in the interest of customers to allow suppliers to recover efficiently incurred costs, as suppliers going out of business ultimately increases costs for all consumers.

Fair By Design’s response to this consultation is driven by the desire to get rid of premiums that those on low incomes pay due to how they pay for their energy.

You can read our full consultation response here. 

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