Premium Poverty: Is the protection gap getting wider?

A recent survey by Premium Credit revealed that well over half of insurance customers can only afford to pay for their premiums if it is done so via credit lines.

According to recent findings by the Financial Conduct Authority,  the UK protection gap is already a concerning 53%  of the population.

Furthermore, the divide between rich and poor has increased significantly since the start of the pandemic. People have less disposable income, many have lost their jobs and some, even their homes.

Premium Credit's study showed that around 4% of those who use credit to fund insurance have canceled buildings insurance while 3% have canceled contents cover. 

Premium Credit’s Insurance Index also reveals that shows 69% of adults use some form of credit to pay for one or more types of cover and that credit cards are the most used form of borrowing ahead of finance from insurers

The price of risk for insurers

The problem is doubly compounded, not only by a lack of income but also by location. Populations that live in poverty-stricken areas are considered a riskier bet for insurers, and therefore, the cost of covering them is higher.

Poverty also brings with it a rise in health problems, further complicating the issue, because pre-existing conditions can make policies too expensive, even for the well-heeled. In fact, the situation even has an official name – premium poverty.

Indeed, official data on home insurance proves that less affluent households are less likely to be covered.

Research also shows that low-income customers can often only afford to pay their premiums monthly, rather than annually, which is typically more expensive. Meanwhile, other reports cite customers being refused insurance altogether based on factors that were outside of their control, such as their location. Data also shows that insurance has overtaken energy to become the biggest contributor to the extra amount that lower-income people have to pay for services deemed essential.

The number of customers buying their premiums on credit is also rising. According to Premium Credit’s report, the following policies are most commonly paid for by credit are:

Percentage of adults using credit to pay for various insurance covers

• Car insurance - 44%
• Home insurance - 44%
• Life insurance - 31%
• Pet insurance - 24%
• Health insurance - 17%
• Travel insurance - 14%
• Critical illness cover - 12%
• Specialist insurance (boat, horse etc) - 5%

Poverty premium causes and recommendations

Poverty premium is now officially defined by the Social Market Foundation as “the extra cost that households on low incomes incur when purchasing the same essential goods and services as households on higher incomes”.

Speaking recently to the Financial Times, Martin Coppack, commissioner at the UK’s Financial Inclusion Commission and director of the campaign group Fair By Design, said, “This is the most overlooked area of financial inclusion.”

“Insurance provides households with protection against financial hardship in the face of income shocks such as unemployment, illness, and bereavement. However, as a result of the poverty premium in insurance, vulnerable and low-income consumers often cannot afford, or are altogether excluded from, insurance that would provide protection from such shocks,” it stated.

Tackling Poverty Premium

Recommendations to government bodies to better protect those trapped in premium poverty were highlighted in the recent Institute and Faculty of Actuaries and Fair By Design study. It called for:

• The Government to determine a minimum level of protection needed by all, including low-income families, in order for them to remain financially resilient to specific risks and unexpected shocks.
• The FCA should support the government in this work by undertaking a study into the regulatory outcomes the market is currently delivering for low-income consumers.
• The Government should look at its role in facilitating the delivery of a minimum level of protection through the use of social policy interventions, such as extending the Flood Re model of insurance for different insurance product lines, to cover low income and vulnerable consumers who are priced out or excluded from the market.
• The Government should work with the FCA and insurance industry to determine what changes are needed within the public policy and regulatory environment to support and incentivise the insurance sector to develop and deliver innovative solutions to address the poverty premium.

Coppack has also urged the FCA to open up what he refers to as the “black box” of insurance pricing, which he believes will create the clarity needed to persuade the government to acknowledge this issue and come up with ways to tackle it.