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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

Jamie Evans, Research Associate at the Personal Finance Research Centre, University of Bristol, posted this blog originally on the Money and Mental Health Policy Institute website.  We are very grateful to them for allowing us to cross-share it below.

While the title above may sound ominous, greater sharing of data between financial firms could bring benefits to creditors and consumers alike – especially where customers in vulnerable situations are concerned.

This is something that I and my colleagues at the Personal Finance Research Centre (PFRC) are exploring in our latest research project, which has kindly been supported by the Barrow Cadbury Trust.

Sharing can be difficult

This may seem counterintuitive but the reason I think this subject is so important is because sharing – on a person-to-person level – is something that can be incredibly difficult to do.

Every day, hundreds, if not thousands, of people face really tough conversations with their creditors. They might need to disclose the death of a loved one, or reveal that they are living with a serious mental health condition which will severely affect their finances.

For many people, sharing such information is draining – no matter how kind, polite and empathetic the person at the other end of the phone line is.

After putting the phone down, the last thing that most people will want to do is to immediately repeat the conversation with one of their other creditors, and then probably another one after that.

Sharing data could be much easier

So rather than having multiple, similar conversations with different creditors – which can be difficult and time-consuming – what if the first creditor that you speak to could simply notify all of the others that you need to deal with?

They needn’t share information about the precise nature of your situation, but they could at least let others know what additional support you might need. This would ensure that all firms that you deal with are in a better position to support you with whatever you’re going through.

In a world of near-instantaneous data transfer, this is theoretically possible – though of course we need to explore the practicalities of doing this and, crucially, need to ask ourselves whether the potential benefits outweigh the costs and possible risks.

How could data sharing work in practice?

The Government’s ‘Tell Us Once’ service, which allows individuals to report a birth or death to most government organisations in one go, offers one possible example as to what such data sharing could look like from a consumer’s perspective.

A service like this offered by financial firms might go down well, especially when multiple firms have similar processes that are time-consuming and potentially upsetting (for example, when registering a death or Power of Attorney).

In time, such a service could be developed to deal with a wider range of customer circumstances.

Of course, describing how such a scheme would work at the ‘front end’ is one thing; saying how it would work at the ‘back end’ is quite another. There are many practical questions to consider: should organisations share information directly with one another, or should it be shared via a third-party database? If so, who manages this database and how do organisations get access to the data?

Then there is the question of how organisations can align the way they record information to make it suitable for sharing in the first place. Thankfully, on this point, financial firms can learn lessons from the electricity sector, which is currently aligning its ‘needs codes’ to improve sharing of information.

What are the risks of data sharing?

While there are potential benefits to data sharing, there are also risks that need to be carefully managed:

  • Customers could lose control of their data. This control is vital if consumers are to trust the service.
  • Firms could make mistakes if information isn’t recorded in a sufficiently clear, consistent or detailed way.
  • Consumers could be inadvertently excluded from financial services because of their situation.
  • Unscrupulous firms could exploit vulnerable consumers, e.g. by carrying out aggressive marketing or targeting them at certain times.

‘A problem shared is a problem halved’

There are clearly many issues to consider here, from the practicalities and costs to the question of what level of data sharing – if any – consumers would be comfortable with.

We are exploring such issues throughout the course of our research, beginning with a review of the available evidence, possible models, and the legal and regulatory frameworks.

Then, in the spirit of the old saying ‘a problem shared is a problem halved’, we’ll be engaging with as many experts as we possibly can. This, we hope, will allow us to produce a blueprint for a model of data-sharing that genuinely works both for firms and their customers.