The Institute and Faculty of Actuaries (IFoA) has called on the UK government to do more to help ensure vulnerable and low-income consumers are not priced out of insurance coverage.
In a new report, the IFoA highlights how poorer consumers are increasingly being quoted higher insurance premiums than their more affluent counterparts, or being refused coverage altogether.
This 'poverty premium' is 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 past medical history.
It has been made possible through technology advancements and increasing amounts of data used by insurers as they shift away from pooling risk across many people, and towards more granular pricing based on an individual’s specific risk factors.
The report – which was co-produced with the Fair By Design (FBD) partnership – recommends a number of solutions, including the creation of reinsurance schemes similar to Flood Re, and auto-enrolment through employers.
David Heath, chair of the IFoA's Policy Advisory Group, said: “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 as a whole.”
Consumers and advocates consulted for the report said that they are in no position to assess whether a high or unaffordable premium, or an insurer’s decision not to offer coverage, 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, as people with certain protected characteristics such as race, sex and disability were less likely to hold any insurance, indicating a level of exclusion from the market.
The report recommends that:
- The government 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
- The government 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 Financial Conduct Authority (FCA) undertake a study into the regulatory outcomes the market is currently delivering for low-income consumers, considering the interaction between insurance pricing and the Equality Act
- The government 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.
“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,” said Martin Coppack, director at FBD.
“The poverty premium means that households often go without insurance, and have to resort to 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.”
Image credit: iStock
Author: Chris Seekings