The UK may have experienced the biggest economic contraction in over three centuries last year but increased house prices and higher savings rates have made the average household £7,800 richer during the pandemic, according to the Resolution Foundation. Cash savings increased and house prices rocketed on the back of record low interest rates and stamp duty relief. However, the think tank has warned that although households have become richer on average, there is worsening financial vulnerability and wealth inequality across the UK.
The gap between the average and the wealthiest 10% of households has increased by £44,000 during the crisis, while the gap between the average and the poorest tenth of households grew by £7,000 .
The vast differences in how individuals and families have experienced and continue to experience the pandemic is front of mind for the insurance sector and identifying those customers who could be classed as financially vulnerable has become a top priority.
Under new guidance first issued in February 2021 , to help ensure vulnerable consumers are treated fairly and achieve outcomes as good as other consumers, the FCA stated that protecting vulnerable consumers is more important than ever due to the impact of the pandemic. The FCA said it expects firms to provide their customers with a level of care that is appropriate given the characteristics of the customers themselves.
Policy history data gathered from over 87% of the motor insurance market is already enabling insurance providers to put the changes in behaviour that occurred during the UK’s three national lockdowns in context to help deliver fairer and more accurate pricing for new business and renewals. This same policy history data on cancellations and gaps in cover could also offer a fresh way to help identify customers who may struggle to afford their motor insurance when they renew or apply for a new policy.
For the insurance market, the indicators of financial pressure have already been seen in the changes to the way people pay for their motor and home insurance cover and in the number of vehicles declared as SORN (Statutory Off Road Notifications) in the past year. March 2020 saw the highest number of SORNs made of any month in the past decade.
A report from Premium Credit revealed that since the pandemic began, 10% of people with car insurance have switched to paying monthly to help spread the cost. Of those individual customers who use credit to fund some or all of their insurance cover, 64% borrowed more in total over the past 12 months than in the previous year.
Consumers cancelling or downgrading insurance cover due to financial difficulty
Around one in twenty (5%) of those who use credit to pay for their insurance have cancelled or amended buildings insurance over the past year because of not being able to afford all of their insurance cover, while 7% have cancelled or amended their contents insurance .
But perhaps the most shocking finding is that nearly one in ten (9%) of people who borrow to pay for insurance have had to sell their cars over the past year because they could not afford the total cost of all their insurance cover. This is three times higher than this time last year.
For many families and individuals, their car is a lifeline. In the height of the pandemic, those that needed to travel for work, including thousands of key workers, may well have chosen to use their car rather than face the risk of travelling on public transport. Giving up a car due to the running costs won’t have been a decision taken lightly.
New data to identify financial vulnerability
Traditionally, identifying financial vulnerability of customers and being able to shape the appropriate coverage has largely relied on the use of public credit data (and where premium credit is offered, the use of private credit data to help determine affordability). However, access to data on motor insurance policy behaviour during the pandemic can offer insurance providers a fresh perspective.
By enabling insurance providers to highlight at speed, at the point of quote, any cancellations and gaps in cover that occurred during the national COVID-19 lockdowns, the market will be in a far more powerful position to identify any financial vulnerability. In doing so, they can have confidence that they are meeting the recommended guidance issued by the FCA.
The creation of COVID-19 related attributes has been a key priority to give motor insurance providers valuable context for policy gaps or cancellations, helping them easily and clearly define lockdown-led decisions by policyholders within the quote process to support fair pricing when they next apply for motor insurance.
But beyond this, there is a huge value in using this data to help identify those that potentially need more support through access to the right cover, pricing and premium payment options for their individual circumstances, to help keep them on the road. By creating these free data attributes we are doing the right thing for our customers so they can do the right thing for their customers.
This article first appeared in Actuarial Post and is reproduced with consent.
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