The IFoA’s upcoming series of Inclusive Insurance Bulletins will examine how the industry can remove barriers to coverage
Insurance offers protection to consumers, businesses and wider society, playing an important role in economic development and supporting wider societal needs. Changes in demographics, advances in technology and medicine, and the increased prevalence of extreme weather events are just some of the factors insurers are grappling with; the current COVID-19 crisis is a more extreme example of rapid change in the global environment that insurance operates in. This societal change raises questions over insurance inclusion: is the current landscape giving rise to insurance exclusion, and how should the insurance market evolve to keep pace and increase inclusion? During the course of 2020, the IFoA will be launching a series of three bulletins that will examine insurance inclusion in more detail, factors giving rise to change, the response from the insurance sector, and resulting societal impacts.
The response of the insurance sector to these changing dynamics provides challenge and opportunity. Governments, regulators, consumer groups and the insurance industry itself are already considering and responding to the evolving environment. Consistent themes are ‘fairness’ and ‘exclusion’, and whether sufficient protections are in place to ensure that insurance remains fit for purpose and does not penalise or exclude those most in need of protection. In particular, there has been much recent regulatory focus on the impact of financial services – including insurance – on vulnerable consumers.
The first bulletin looks at drivers of change, and how the industry will need to adapt to the needs of society in response to changing lifestyles, new technologies and healthcare advances. Here we present three industry views: one examining the role of wearables, another emphasising that consumers’ needs must always be kept in mind, and the third looking at the economy.
The first bulletin of our Inclusive Insurance series is titled Drivers of Change. As well as looking at the above topics in more detail, it will also consider a range of other factors, including the rise of the gig economy, genetics and climate change.
If you want to contribute your own perspective to the IFoA’s Inclusive Insurance Bulletins, contact [email protected]
Consumer needs
Hannah Poll, Citizens Advice
Citizens Advice research found that loyal home insurance consumers are paying a £750m loyalty penalty every year when renewing. Despite submitting a super-complaint to the Competition and Markets Authority in 2018, urging the identification of interventions and protection for consumers, we are yet to see the steps required from regulators to prevent this.
Most people don’t realise they’re paying a loyalty penalty, even when premiums are increasing. Two in five people who have had their policy for a year or more think loyal customers are charged the same as, or less than, new customers.
“Most people don’t realise they’re paying a loyalty penalty”
Loyalty isn’t always a conscious choice. A recent Financial Conduct Authority (FCA) market study found that insurance firms engage in practices that make it harder for consumers to make informed decisions. Consumers must exert an unreasonable amount of time and effort to navigate the market successfully. This especially impacts vulnerable and low-income consumers. For example, one in four people who have experienced a mental health problem during the past 12 months have avoided switching because they found the idea of it overwhelming (Citizens Advice, The Mental Health Premium, 2019).
It is unreasonable to expect consumers to understand the nuances of a complex market. Without remedies that address the structural causes of the loyalty penalty, some consumers will continue to be exploited. The FCA must focus on supply-side interventions that increase pricing fairness and transparency, and set out specific protections for low-income and vulnerable consumers.
Technological advances
Anna Spender, IFoA Wearables and Internet of Things Working Party
The range of wearables, devices and apps that measure, track and aggregate health and lifestyle measures is ever-expanding. The use of these technologies, and the richness of data that they provide, creates both opportunities and challenges for the insurance sector and consumers alike.
Wrist-borne wearables and smartphones in particular make measures that were previously only available in laboratory or clinical settings readily accessible to anyone prepared, and importantly able, to spend money on these devices, associated platforms and apps. This is important because the cost of wearables creates barriers to inclusivity: only those able to afford them will reap the benefits of integrating data from these devices with their insurance provision.
“The cost of wearables creates barriers to inclusivity”
Information from these devices can be used by insurers in multiple ways, some of which could enhance inclusivity and others which may result in exclusion. The data can be used to better identify consumers’ risk profiles. While this can undermine the principles of risk pooling and cross-subsidy, it could also open up the market to previously excluded groups by enhancing understanding of risk, and encouraging behaviours aimed at reducing risk via feedback and behavioural nudges.
Where wearables are found to have a positive impact for consumers, either by reducing premiums or encouraging ‘positive’ behaviours, insurers and/or health services should facilitate the purchase of wearables for those with little disposable income.
The economy
Colin Dutkiewicz, IFoA Life Board
Economic conditions can have a significant bearing on the demand for insurance (life insurance and savings often do not get priority); insurers’ returns on investments and assets; and prevalence of claims. These affect premiums, and ultimately whether people can afford insurance or believe it offers good value.
Life and non-life insurers are exposed to economic conditions such as recessions and fluctuations in inflation, interest rates and investment returns. For non-life insurers, new business sales are correlated with domestic consumption (eg car purchases) and insurance purchases. During a recession, it is common to see non-life insurance sales decrease. The industry also saw fraudulent claims after the 2008 financial crisis.
For life insurers, which have long-term liabilities, success depends on investing in a way that matches these liabilities. This would typically be relatively conservative, but with a search for additional returns in long-dated illiquid assets such as infrastructure and property. This is good for the economy and, when successful, consumer product pricing.
In recent years, the economy has had a significant impact on the availability and affordability of non-life and life products. Decisions made by the government and regulators, and actions taken by the industry, mean the impact has manifested differently across the sector, thereby commanding a range of solutions. Some solutions will be sector-specific – eg alternative vehicles for offering long-term guarantees or addressing loyalty penalties. Others will be relevant sector-wide – eg removing barriers to shopping around, financial advice and building financial capability.
The IFoA can play a role by drawing together expertise from across the industry to inform debates on whether the sector is operating in the public interest. In our bulletins, we will be looking at potential solutions and considering how the industry can increase inclusion, particularly for those who are vulnerable, or in lower socio-economic groups.
