People are cancelling vital insurance due to the cost of living. If we’re to learn the lessons of this crisis, insurers need to think big.

The cost of living crisis has laid bare the cracks which exist in essential markets. Shocks whose origin lies way outside of people’s control have shattered the financial resilience of households and shown how little there is in place to ensure people don’t lose access to key services which form part of daily life. By filling these cracks we have a chance not only to help people through this crisis but to build markets which are more inclusive and more resilient to future shocks.

One of these markets is insurance. The FCA has raised concerns about the cost-of-living crisis forcing people to cut back on insurance and recently told the sector it needed to do more to protect people. This really matters. Cancelling or cutting back on insurance can leave people exposed to potentially life-shattering risks. There are also immediate effects: without car insurance you can’t drive; without home insurance you may be in breach of your mortgage.

We’re seeing this on the frontline. We regularly survey a panel of frontline advisors and earlier this year found 19% had seen people coming for help who had cancelled life, home or motor insurance due to the cost of living. We’ve also seen this through consumer research tracking the impact of the cost of living. In the first half of this year around 1 in 5 motor insurance customers cut back or cancelled their insurance as a result of spiralling bills. And of course, the cost of living crisis has been getting worse.

The cracks we need to fill

In the first half of this year more than 600,000 households cancelled car insurance due to the cost of living. This in itself should raise concerns, however it’s when we dig into particular groups that things start getting really worrying. When looking at people’s financial situation, we found those with less financial resilience were much more likely to have cancelled their car insurance. In particular:

• People on Universal Credit were 3.5 times as likely to cancel their car insurance because of the cost of living than the national average, with around 10% taking this step.
• This rose to 13.9% for people newer to benefits (receiving UC for less than a year) — that’s 4.5x the national average.
• Those behind on their bills were almost three times as likely to cancel car insurance, with 8.8% doing so.
• Similarly, people on less stable incomes which vary month to month were over twice as likely to cancel car insurance (7% had done so).

The picture here is of significant numbers of people in tight financial positions, including people in arrears on other bills, having to cancel their insurance in order to make ends meet. It is also striking that people in changing financial situations, including those new to benefits or on less regular incomes, are also more likely to have cancelled insurance. This isn’t limited to motor insurance. We found similar patterns within home insurance.

It goes without saying that people in these circumstances still need the protection insurance offers. Arguably the need for it grows as people are less able to manage the shocks which insurance protects them from. So it’s deeply concerning to see such high numbers of people in these circumstances cancelling their insurance due to the cost of living.

So what can be done? To answer that, the insurance sector and their regulators have to address two key questions:

1. How can insurance providers keep people covered through financial shocks?
2. What are the longer term routes to ensuring affordable access to insurance for people on lower incomes?

These questions are not unique to the current crisis but they are now much more urgent. The good news is that they’re not new — there are good ideas in other key services like energy, telecommunications and credit where we can draw inspiration.

1. How can insurance providers keep people protected through financial shocks — is there a role for forbearance in insurance?

This isn’t just a question for insurers — many sectors have had to think about how to support people who are going through financial difficulties. Consumer credit providers, for example, are required to treat their customers with “forbearance and due consideration” where they are unable to meet payments. What this means in practice can vary depending on the customer’s specific circumstances, though it tends to include options like deferring payments, waiving additional costs like interest, fees and charges, and looking at alternative payment plans. While the methods vary, the outcome desired is clear: customers in financial difficulty should be supported to see if the relationship can be maintained and the alternative — default, spiralling costs and engaging debt collectors — avoided.

Of course, insurance isn’t the same as consumer credit. If you can’t afford your insurance premium you can simply end the contract and stop receiving the service. But insurance isn’t a subscription people can simply do without — for many it’s essential — so the analogy with credit bears some consideration.

Firms should have similar processes in place to explore options which aim for people going through financial difficulties to remain suitably insured and avoid the risks and consequences which come with being uninsured. These options would, presumably, include checking that the customer isn’t over-insured so looking to lower the cover to lower the price. It’s absolutely critical, however, that this doesn’t lead to consumers paying for unsuitable products which are cheap but deliver real value. But it could also include temporary pauses in payments or a discount, allowing appropriate cover to continue for a period of time at a lower price.

2. Longer term routes to ensuring affordable access to insurance for people on lower incomes — what can insurance can learn from energy and telco?

Some of the ideas discussed above come close to the territory of social tariffs. These are more systematic mechanisms which aim to increase access to a service for people on low-incomes by reducing the price. In some markets this could mean offering a bespoke service to these customers — this is seen in the telecoms market where most broadband operators offer a social tariff product at a rate below the market value. In others, such as energy, the approach taken is to offer eligible people a fixed discount via the Warm Home Discount.

The two approaches — tariffs vs discounts — are not interchangeable and there is a lively debate at the moment around whether something more like a social tariff would work better in the energy market. But what is accepted across both markets is the need to support customers on lower incomes accessing an essential service.

The fact that people on Universal Credit have been 3.5 times as likely to cancel motor insurance than the average consumer suggests that the time may be right to look at the role ideas such as these could play in insurance. This isn’t just about the current crisis — it’s about financial inclusion in a core financial market.

Ideas such as these can feel alien: having a social tariff for insurance feels like throwing out a sacred principle that price should be determined by risk. But now is the time to push through these barriers and to think creatively.

In the credit market, which also prices according to risk, trials of no interest loans appear to be showing signs of success. This should be taken as a source for inspiration.

A different inspiration is the way that insurers, regulators and government addressed flood insurance, although this has a slightly different flavour. In the case of Flood Re, the problem was that the risk was so high that the insurance was unaffordable. The problem raised by the cost of living crisis is that people with even normal levels of risk may simply not have enough money to afford basic cover.

There are, of course, many things to consider. There’s the question of tariff vs discount (for what it’s worth I suspect the latter makes more sense for something as personalised as insurance) but also broader questions around how to fund such a scheme and how to share costs fairly. But the main question is whether not considering such options would be to miss both a fundamental lesson from the current crisis and an opportunity to address wider issues around financial inclusion in insurance markets.

Building resilience into the system

If we’re to learn the lessons of the cost-of-living crisis, insurers and their regulators need to answer some fundamental questions about supporting customers. Finding ways to help people remain insured through temporary financial difficulties and enabling access to affordable, suitable cover for people on lower incomes would create a fairer and more inclusive market. This should be done alongside addressing known problems like the ethnicity penalty at a time where people of colour are three times as likely as white people to have cancelled car insurance due to the cost of living.

These ideas would be worth pursuing even forgetting the cost of living crisis, but in such a crisis their absence becomes more pressing. Now is a time for insurers and regulators to think big and to consider measures which will help people through the current crisis, be resilient to the next one and — critically — ensure they can continue to access insurance to protect them from risks each day.

The statistics in this blog came from nationally representative polling conducted by ICM for Citizens Advice. ICM conducted a nationally representative sample of 6000 people in the UK between 27 May and 17 June 2022.