Fair By Design and the Institute and Faculty of Actuaries (IFoA) collaborated on a research project to better understand the causes, extent and impact of the poverty premium in the insurance sector.

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 for 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 increasingly possible by advances in technology and increasing amounts of data that can be used by insurers.

As a result, 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” provides practical solutions to ensure everyone has a fair chance of being able to protect themselves and their families.

Fair By Design and the IFoA 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.