Time to put the brakes on personalised insurance pricing

Getting access to insurance at a reasonable price should be a universal right. If our house burns down, our car crashes or – worse still – we die and leave our family without the income they depend on, insurance provides the financial safety net that otherwise would not be there for most of us.

But the dynamics of the UK insurance market are such that we increasingly price certain groups of people out of buying cover altogether – often those who are most vulnerable.

The poverty premium

A new report – published today by the Institute of Actuaries and the not-for-profit Fair By Design – lays the problem bare. It shows that the so-called “poverty premium” – the extra amount that those on lower incomes have to pay for goods and services – is getting worse in insurance, with growing numbers of people forced to go without the protection they need as a result.

If you’re unemployed, you will pay more for your car insurance. If you live in a poorer postcode, you will pay more for your home insurance. Furhermore, if you’re on a low income, you’re likely to need to pay monthly rather than annually – meaning hefty interest will be added to your premium.

And while the report only focuses on insurance, it’s also true that if you’re poor, you will typically pay more to borrow, more for your phone and more for your energy.

The report estimates that on average, lower income families pay £500 a year more for essential services such as credit, energy and insurance.

Bottom line - we have created a financial services market, which charges the most to the people who can least afford it.

The problem with personalisation

Underwriters and risk specialists will roll their eyes. Yes, of course those people pay more, they will say – they represent a higher risk. But while it may provide fairness from a risk perspective, it clearly doesn’t stack up from a social one.

The report rightly seizes on the fact that the growing availability of data has left insurers competing to identify the perfect price for each individual risk. While car insurance may once have been determined mostly by your age, the car you drive and where you live, insurers are now looking at your credit score, your occupation, and even your grocery basket.

The insurance professional’s defence of this trajectory is that the sophistication of today’s pricing is offering lots of people better prices – and that may well be true. But at the margins, it is inevitably piling pain on those who can least afford it.

If the social justice argument is not persuading you, it’s worth pointing out that today’s pricing models don’t just deliver bad outcomes for the poor and vulnerable. Readers of my columns in the past will have already heard me bang on about the injustice of some insurers hiking prices for customers after they’ve been involved in an accident that wasn’t their fault.

The justification is that, statistically, you are more likely to be involved in another accident. And that’s because very few accidents are 0% one person’s fault and 100% the other’s. But some are. If you’re parked up and a car crashes into you, it’s literal insult to injury if the insurer increases your premium.

The reality is that perfectly personalised pricing is never going to be achievable. And for every statistical assumption you make, you will be doing wrong by a small sub-set of customers who do not deserved to be tarred with the same brush as the others in that pot. As the report points out, insurance has moved miles away from its founding principle of pooled risk. And it’s time for government and regulators to intervene.

Time for some boundaries

So what’s the answer? Fair by Design and the Institute of Actuaries are calling on the government to determine a minimum level of protection for all, in order that everyone can be resilient to unexpected shocks. And they want to see the FCA and Treasury Select Committee carry out analysis to better understand the range of customer outcomes that the market is currently delivering.

But the report stops short of volunteering the policy solution.

To my mind, we need to draw some boundaries around what data insurers can use to set their prices. As a starting point, any factor that is not directly linked to the risk should not be included. For example, occupation is not relevant for car or home insurance – unless you drive for a living. The fact that you can draw statistical links between certain occupations and propensity to have an accident is not enough to justify use of that data.

I happen to know that journalists pay more for insurance than many other professions – and it’s true in my experience that many journalists have a bigger propensity for taking risks than the average person. But it’s certainly not universally true and there’s no causal link between working for a newspaper and poor driving, so it’s simply not a factor that should be taken into account when setting a car insurance price.

Next, low income needs to be added to the list of protected characteristics and subject to the provisions of the Equality Act. That would mean insurers would not be allowed to charge more to people who pay monthly and not be allowed to load premiums for those who live in poorer postcodes.

Yes, it will mean some of us need to pay a little more for certain insurances – pushing us back to towards more pooling of risks. But the end result should be that everyone can get access to insurance, and we are more financially resilient as a society and a nation.

This article was first published in the Telegraph in September 2021