Fairer Finance is calling time on unfair and discriminatory pricing models used by car and home insurers in the UK that are driving a “poverty premium”, systematically penalising Britain’s most vulnerable families.
In its new report, Fairer Finance reveals UK insurance companies are using up to 400 data points to price home and car insurance premiums – such as email domain, birth location, and even the time of day consumers apply. The majority of these factors have no obvious link to the customer’s underlying risk – and many penalise those households with the lowest incomes.
The study reveals significant public concern about current pricing practices, with 72% of consumers considering it unfair to charge different rates based on their email address, while 54% oppose the use of credit scores in motor insurance pricing.
While other countries have moved to limit discriminatory pricing factors, in the UK, there is currently no transparency required for insurers to disclose what factors they use in their pricing models or to disclose the weighting that is given to each factor.
The ‘poverty premium’ exposed
While this pricing precision has offered lower prices to many consumers, it has also raised prices for higher-risk groups and increased the ‘poverty premium’. Many factors insurers use to price are focused on income – from credit score to occupation, to whether or not a customer needs to pay monthly – unfairly penalising or excluding certain low-income demographics from the market.
Fairer Finance commissioned new research to understand customer perceptions around the use of different factors in motor insurance pricing. While people were overwhelmingly in favour of using factors such as driving experience (77% said it was “fair”) and at-fault claims history (85% said it was “fair”) – the majority disagreed with using factors like credit score, email addresses, and even postcode. Furthermore, 60% of women think it’s unfair to be charged more for motor insurance based on their occupation (vs 46% of men). In some cases, insurers even examine loyalty card data and the time of day an application is made.
James Daley, Managing Director at the independent consumer group Fairer Finance, commented: “Insurance pricing has become ever more complex and opaque – and while this sophistication has delivered lower prices for many, it has also left some groups priced out or unable to get access to insurance. Our research found that in many cases, insurers are penalising customers for their propensity to claim, not their underlying risk – meaning lower income households are hit with the highest costs. As well as higher premiums, they are also forced to pay high interest rates if they need to spread the cost and pay monthly.
It’s clear that consumers do not endorse the current direction of travel, and it’s now time for Government and regulators to intervene. We have made five considered recommendations to policymakers which we believe can improve outcomes for consumers, whilst ensuring we maintain a sustainable and profitable market for insurers.
Fairer Finance’s Trust in Insurance Index shows that trust in insurers has been falling over the last two years – and claims satisfaction rates are also in decline. The Government understands that there is an issue here, which is why it has established a new Financial Inclusion Committee and Motor Insurance Taskforce. We urge them to consider our report and recommendations seriously as they put together their financial inclusion strategy over the coming months.”
Fairer Finance makes five recommendations to Government and regulators to create a fairer insurance market
In other markets around the world, regulators have already moved to limit the factors that insurers can use to price on. Yet, the study found evidence to suggest that removing one or two factors is unlikely to have the desired impact. As a result, Fairer Finance is recommending that the Government and regulators create some new boundaries around pricing – prescribing the factors that insurers can use.
1a. Prescribed risk factors: HM Treasury and the FCA should limit insurance risk factors to a prescribed list (driving experience, car value, property age, etc.) for motor and home insurance. A comprehensive study should assess the impact of restricting pricing factors in the UK insurance market.
1b. Transparency requirements: If prescribed pricing factors aren’t implemented, insurers should be mandated to publish their pricing factors and explain their impact. The FCA should allow consumers to experiment with application answers without fraud risk flagging.
2. Standardised telematics score: The FCA should introduce a portable, standardised telematics driving score with transparent calculations that doesn’t automatically penalise minor infractions like speeding. This would create competitive pricing for safer drivers and reduce insurance costs.
3. Social tariffs for high-risk groups: HM Treasury should collaborate with industry to design lower-cost social tariffs for customers facing high premiums due to uncontrollable factors like age and postcode. Government should examine the relationship between benefits and personal injury payouts for young drivers.
4. Ban on non-fault penalties: The FCA should prohibit insurers from charging customers more for non-fault accidents or significantly increasing premiums during ongoing claims when customers cannot switch providers.
5. Insurance blackspot process: The FCA should establish a process for reporting insurance blackspots, then invest in new datasets to encourage market entry. Where data is insufficient, a Government-backed reinsurance scheme should temporarily support coverage with multiple competing insurers.
Daley continued: “The debate around fairness in insurance pricing has been growing in recent years, as more examples emerge of people being excluded or priced in a way that is perceived as unfair. While there are reasonable arguments in support of using more data, rather than less, to price insurance, the new research for this report illustrates that consumers are not supportive of the direction of travel.
While the general insurance industry has been reluctant to open a debate on how insurance is priced, these results suggest that a failure to do so may continue to undermine levels of public trust in the sector. It’s time for the Government, the regulator, and the industry to act together to address this.”
