People on low incomes are giving up insurance due to ‘poverty premium’

The research, which was supported by Fair By Design, found that insurance is becoming increasingly unaffordable for those on low incomes, as they are charged a ‘poverty premium’.

This means they pay more for insurance cover due to reasons they cannot control, such as where they can afford to live.

The report draws on an online survey of 1,537 UK adults living in households with equivalised low income below 60% of median, conducted by Public First on behalf of SMF, as well as two focus groups.

The research detailed that 7% of people believe that it is fair that those on lower incomes pay more for their insurance, while the majority (66%) believe it is unfair.

The SMF has estimated that 5m people in poverty would find it impossible to pay for an unexpected cost of £500 without outside assistance.

Over the next five years, an estimated 2m people in poverty could potentially face an insurable loss.

Higher risks

The report set out two distinct reasons for people on low incomes paying more for insurance. Some people on low incomes are faced with higher risks, which can increase the prices. This could be because they might live in areas with higher rates of crime, SMF reported.

The insurance market is operating in a way that means too many people in poverty either can’t afford that product, or face unexplained higher costs when they do buy it.

James Kirkup

However, it added that people on low incomes pay higher prices because of other factors, including premium paid to meet insurance costs monthly rather than in a lump sum, and many people in poverty have single-item insurance policies, which would be more cheaply provided through a household contents policy.

James Kirkup, director of the SMF, said: “Insurance is rightly seen as an essential good; something that everyone should have to protect them from unexpected losses.

“Yet the insurance market is operating in a way that means too many people in poverty either can’t afford that product, or face unexplained higher costs when they do buy it.

“People going without insurance reflects both the cost-of-living crisis and the way the insurance market works for people in poverty.

“We need politicians and regulators work with the insurance industry to investigate the causes of the poverty premium, so that everyone can get this vital product at a reasonable price.”

Kirkup hopes the sector will rise to the challenge of addressing the poverty premium to ensure even more people can benefit from insurance.

Financial storms

Martin Coppack, director of Fair By Design, stated that it is clear from the research that people are not happy about being charged more for things that are outside of their control.

Coppack added: “Insurance helps us weather all kinds of financial storms. We all want to feel like we have a safety net. But we have two types of markets. One that works for the heathy and the wealthy, and one that penalises people for being poor.

“Sometimes we have to have insurance, like motor insurance, which is a legal requirement. For motor insurance, you can pay hundreds of pounds more simply because of where you can afford to live – no matter your claims history. What’s more, if you can’t afford to pay your insurance all in one go, you can end up paying well over another £100.”

Insurance helps us weather all kinds of financial storms. But we have two types of markets. One that works for the heathy and the wealthy, and one that penalises people for being poor.

Martin Coppack

He detailed that the government has said this is a job for the financial regulator to consider, while the regulator has said this is something for the government to sort out.

Coppack concluded: “We are stuck in a continual policy ‘ping pong’, while those on the very lowest incomes continue to pay more for being poor. This is why we are calling on the regulator to investigate the poverty premium in the insurance market to put an end to this stalemate.”

Customers’ wellbeing

The Financial Conduct Authority warned insurers, in September 2022, to support customers’ wellbeing during the cost-of-living crisis. Executive director, Sheldon Mills, wrote to industry CEOs to make sure their customers are protected from unnecessary products of add-ons and unfair penalties.

The British Insurance Brokers’ Association included in its 2023 manifesto the role brokers can play to help the UK tackle the current cost-of-living pressures.

The trade body stressed that the financial resilience of consumers and businesses could come under renewed pressure.

At the beginning of 2023, broker ECH Facilities launched a home insurance policy, in partnership with the Salvation Army, to help people on lower incomes to protect their contents, and help close the premium poverty gap.

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