After a health shock, Paulette Mattan and her husband were taken out of the workforce in the 1990s, and paying for insurance to use the car, or to cover the contents of the home, became an unaffordable luxury.
“You just really live,” said the 55-year-old, who lives in a disadvantaged part of south London. “And even worse, where you live [the cost of cover] Higher than that, so you were kind of priced out of the market.”
Mattan, who’s back in business, has since taken a single cap on certain items in the home: an expensive and partial solution.
Her experience illustrates the challenge faced by low-income people seeking insurance coverage and how unexpected change in circumstances can deprive a family of risk management products that many people take for granted.
“This is the most overlooked area of financial inclusion,” said Martin Kobak, director of the campaign group Fair By Design and commissioner at the UK Financial Inclusion Commission.
Official data on home insurance shows that less affluent families are less likely to be covered.
Research shows that people with lower incomes are more likely to pay more because of where they live where they can afford car or home coverage, as insurance companies assume a higher level of claims in disadvantaged neighborhoods. Moreover, these customers can often only pay their monthly installments, rather than annually, which is usually more expensive.
Insurers justify the extra costs by saying that customers take an actual loan and pay it off over 12 months but accept revocation of coverage if the customer stops paying.
Research indicates that the problem is getting worse. A report published in September by the Institute and College of Actuaries and Fair By Design showed that insurance has outstripped capacity to become the largest contributor to the so-called “poverty premium” – the extra amount low-income people have to pay for services deemed essential.
The study expects this trend to continue as insurance companies take an ever more individualistic approach to pricing risk.
The general principle of insurance is that the premiums of the many are paid for the claims of the few. But some experts worry that accurate identification of risks, aided by the increasing amount of data accessible to insurers, will make certain groups of people and regions increasingly uninsurable.
People with living experience with poverty who were consulted in the report, like Matan, cited barriers including unaffordable premiums or “refusing insurance entirely based on factors that were beyond their control.” Participants in the debate were particularly grieved because they were punished because of where they lived, when they had no choice to move.
The cost difference based on the level of deprivation in a given area is “astonishing and growing,” according to Sarah Davis, a senior researcher at the University of Bristol. Comparing car insurance costs for the same person and vehicle details, the additional cost of coverage in a disadvantaged area, compared to a more affluent area, rose from an average of £74 in 2016 to £298 in 2019, she said.
“There are some insurance companies I have already spoken to [calculate the] Freddy McNamara, founder of Cuvva Auto Insurance, said:
Cuvva uses traditional rating factors like ZIP codes to price some of its policies, but aims to phase out that because it increases the weight of its pricing for actual drivers’ behavior behind the wheel. Macnamara understands that using zip codes is unfair to customers who can “drive well.”
The use of people’s credit scores to lock rates, another traditional component, is under greater scrutiny.
In the United States, states such as California, Michigan, and Massachusetts now prohibit or limit the practice of using credit scores to determine insurance costs. Root Insurance, a US start-up that covers auto costs at a higher cost of behavior, has campaigned “drop the score”, calling on regulators to stamp out the practice. It has committed to doing so by itself by 2025.
The IFoA/Fair By Design study included a range of potential treatments to support low-income insurance buyers. The first is the new rules for eliminating additional fees for paying monthly. Another way is to create “Postcode Re,” a program that would take on the additional risks of a home or car insurance policy in certain areas, similar to the Flood Re initiative to support flood-prone homes.
The report called on the government and the regulator, the Financial Conduct Authority, to investigate the minimum protections that low-income families need and how they are treated.
Kobach urged the FCA to open what he called a “black box” of insurance pricing. “This will create the clarity needed to convince the government to acknowledge this issue and come up with ways to address it,” he said.
The FCA said it was discussing the report with Fair By Design and was “working to identify areas where regulation might assist in the fair treatment of clients, especially those at risk.”
The regulator is already studying factors including how insurers use zip codes, in its broader work on pricing and value to customers, according to a person familiar with the matter.
When asked about the government’s proposal for Postcode Re and other treatments in the report, it said that defining insurance terms is “a matter for insurers based on their assessments of relevant risks.”
The Association of British Insurers said its members aimed to “offer affordable coverage to as many people as possible while balancing the setting of premiums to reflect the risk and be fair to all customers”.
But Matan feels this industry has been unfair to her and her husband. “It feels like there is a class gap,” she said, referring to the additional costs of paying monthly. “Those who can afford it, get cheaper premiums. Those who can’t afford it, you have to pay the price.”