Insurance products are essential to provide protection from financial loss and peace of mind for consumers. They build resilience when people are affected by illness, car accident or when appliances break. Despite being essential, low income households face a number of barriers to accessing the insurance market.  

Price is a key factor in accessing insurance. An individual struggling to heat their home is unlikely to be able to afford insurance.  

If low income consumers can afford insurance, they are often hit with additional costs. Paying in instalments for car insurance can cost £160 more a year than paying in a lump sum. In addition, people in less affluent areas are hit by a postcode penalty and can pay up to £300 more for the same insurance products. These extra costs are known as the poverty premium in insurance.

We are working to address the barriers low income consumers face in the insurance market and to find solutions to ending the poverty premium.  

Zahada's Story

Full Report
Summary

Insurance and the poverty premium  

A report by the Social Market Foundation supported by Fair By Design

We supported Social Market Foundation on their research report Insurance and the poverty premium, released in March 2023. The research shows that insurance products should be regarded as an essential, with their take-up and cost for low income families considered in a similar way to that of energy, fuel and food.  

Findings  

  • Over half (55%) of people in poverty are finding it difficult to pay for their insurance amidst the cost-of-living crisis – leading some to give up insurance as they prioritise food and energy bills 
  • People in poverty pay more for the same cover because of a range of factors including how insurers price risk and the extra cost of paying for insurance  monthly rather than all in one go.  
  • People in poverty pay more because they experience different risks. Some lower income individuals are considered to face higher or more costly risks than others. The market charges insurance premiums that are higher to reflect these increased risks. 
  • People in poverty think this is unfair. Just 7% of people on low incomes believe that it is fair that those on lower incomes may pay more for their insurance, and 66% believe that it is unfair. 
  • Most people in poverty believe that motor insurance should be classed as an essential just like energy and food. Some lower-income individuals pay up £500 a year extra for car insurance which is unfair. 

Recommendations 

  • The Financial Conduct Authority (FCA) should investigate the poverty premium in insurance. FCA investigation should publish results on firm-by firm basis to provide the data needed to hold firms to account. 
  • Government should undertake a review of potential interventions. Where a social policy response is identified as being needed, the Government should undertake a review of potential interventions that could tackle it.  
Press Release: Priced out – Poor people giving up insurance due to ‘poverty premium’
IFoA Full Report Front Cover
Full Report
Summary

The hidden risks of being poor: the poverty premium in insurance  

A report by the Institute and Faculty of Actuaries and Fair By Design  

In September 2021, we worked with the Institute and Faculty of Actuaries (IFoA) collaborating on a research project to better understand the causes, extent and impact of the poverty premium in the insurance sector. 

The research project 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. 

This is part of what we describe as ‘the great risk transfer’, the shift away from a pooling of risk across many different people towards 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. 

Recommendations 

  • The Government should look at how it can facilitate the delivery of a minimum level of protection 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.