Is insurance an essential service?
For someone who needs a car to keep their job, or a person with mobility problems who needs a vehicle to get around at all, the answer is clearly yes.
A group of academics and public policy organisations is going further, and pushing for some insurance products to be thought of as vital for everyone — and demanding fixes to what they see as a broken market for low-income customers and people of colour.
The Social Market Foundation, a UK think-tank, argued in a report this week that insurance should be considered alongside energy, fuel and food as something that everyone should have, “a vital form of resilience in times of financial strain”.
For families caught up in today’s cost of living crisis, other necessities have taken precedence. “I had to cancel my contents insurance to be able to pay for my fuel. I hope nothing goes wrong,” said one low-income person in a focus group for the SMF. More than half of people in poverty are finding it difficult to afford their insurance, the organisation found.
And because the insurance market is the insurance market, adversity is already penalised. Living in the wrong postcode, having a bad credit score, only being able to pay monthly or to insure single items, mean even the most conscientious drivers and homeowners pay more than others in a different situation.
Low-income people are “priced out” of the market due to these factors, the SMF and others argue. In a report last year, Citizens Advice said higher insurance costs for certain areas should be viewed as an “ethnicity penalty”.
These studies have limitations: researchers do not know how insurers’ pricing models actually work. Researchers are forced to draw conclusions from mystery shopper exercises, or data provided by consumers.
Insurance companies insist ethnic identity is “never” an input in pricing, and a Financial Conduct Authority review in 2018 found “no evidence” of direct discrimination.
Firms argue that prices reflect claims experience, nothing more. And without risk selection based on experience, there wouldn’t be an insurance sector at all.
Not all of these arguments wash. We do not leave people in flood-exposed homes, for example, at the mercy of their personal risks: government intervention has driven down the cost of their home insurance. In the US, some states ban or limit the use of credit scores, reflecting concerns that certain groups are disadvantaged.
Questions will keep coming. Duncan Minty, who consults on ethics in the insurance industry, says the insurance sector is one the public feels ownership of, because it is “so embedded” in our everyday lives. “It has become a form of common good,” he says.
Insurers are happy to stress their social role. At a recent industry dinner, the Association of British Insurers’ Hannah Gurga declared proudly that the sector takes care of those “struck by disaster” and those who “lose their jobs”.
“This industry, all of you in this room tonight, does more than any other to make our society more resilient, more secure and more compassionate,” she added.
Customers that can no longer afford insurance cover due to a factor outside of their control may feel differently.
The FCA is consulting on fresh guidance for how to treat customers in financial difficulty. The regulator has called on firms to show that pay-monthly charges are “proportionate”.
Attention has also turned to a new consumer duty, which requires financial firms, including insurers, to demonstrate they have produced “good outcomes” in areas including pricing.
Campaigners want the regulator to gather a lot more data, whether that be to investigate which firms are demanding the largest poverty premium, or to identify clear evidence of racial disparities. The SMF has called for government to consider actions such as providing state-backed insurance products for people on means-tested benefits.
A lot will rest on the FCA’s use of the consumer duty, and how far it will challenge insurers over the outcomes that are spat out of their pricing models. But not everyone wants it to take a more combative approach against financial firms, with the City minister said to want to avoid creating a “compensation culture”.
For an insurance sector that has already undergone significant reform in stamping out so-called loyalty penalties, another intervention seems unlikely in the short term. But with groups such as Citizens Advice promising to keep its feet to the fire, difficult questions of pricing fairness for different social groups will need answering sooner or later.