The need to tighten belts is prompting a worrying number of UK households to strike insurance from their Christmas shopping lists, leaving the already vulnerable at greater financial risk. Are insurers in a position to help this lost generation, and could this be a market worth tapping?

It may be the festive season, but not everybody will be in the mood to celebrate. The tough economic climate and swingeing government spending cuts means that more and more people in the UK will be forced to scrimp and save this Christmas. And it will come as little surprise that insurance is one of the first things to drop off many consumers’ to do lists.

According to recent research by The Co-operative Insurance and housing and homelessness charity Shelter, over one-fifth (5.41 million) of households in the UK have no insurance protection in place, with 42% of those claiming that they cannot afford to take out cover. And, shockingly, the research shows that, on average, those that are insured are under-insured by £4,650.

That’s not all. A recent survey by Biba shows that 57% of brokers have seen personal lines customers reduce their levels of insurance protection during the economic downturn, by cutting down on buildings and contents insurance, increasing excesses to reduce premiums and deleting add-ons such as personal possessions, accidental damage, legal expenses, breakdown and home emergency.

The Co-operative’s head of home insurance Lee Mooney believes this is an alarming trend. “At the moment everyone is, understandably, looking to save money. But worryingly high percentages of the population do not have home insurance and are leaving themselves open to much greater risks and expenditure in the long run.”

As an example, Mooney points out that if a fire starts in an uninsured home, and causes damage to surrounding properties, the uninsured person will be liable for the repairs of all damaged properties.

Social exclusion

Despite the risks posed by lack of cover, it seems people are cutting back wherever they can. The Genworth Financial Vulnerability Index, which surveys 14,000 households across Europe, shows that anxieties about finances in the UK have swung back to the levels recorded at the height of the financial crisis in 2008.

These bleak reports are leading to worries

that the current climate could create a ‘lost generation’ unable to access to the benefits of insurance. “The research shows there is potential for this lack of insurance to grow, because 42% say they can’t afford it. This is obviously a concern from a social inclusion point of view – and an insurance point of view because the market will contract,” Mooney says.

Furthermore, an ABI spokesman points out that the great majority of people not taking out insurance live in the UK’s most economically deprived areas. And, while it may be argued that this category has less to protect, they are also more vulnerable to risk and are least likely to be able to recover financially from a loss (see ‘Can’t pay, won’t pay’, below).

The National Housing Federation (NHF) estimates that as many as 90% of social housing tenants do not have any form of insurance cover. Yet social housing providers have incentives to promote insurance. Financial inclusion adviser at the Chartered Institute of Housing (CIH), Paul O’Connor, suggests that recharges – where a housing association meets costs incurred by tenants that would normally be covered by insurance – can cost up to £250,000 each year.

And there are plenty of motives for the insurance sector too. The CIH argues that a large and relatively stable market, even with a small margin, can still return a profit. “If 90% of the people that live in social housing don’t have contents insurance and millions live in social housing – that is quite a lot of revenue,” O’Connor says.

Furthermore, Avantia chief executive David Walker suggests that capturing this share of the market could be worth up to 5% of the value of the household insurance market – currently at £7.9bn GWP, according to market analyst Datamonitor. “There is a gap in the market for somebody to take this problem on. There is a group in society that is not being catered for because products are too expensive or complicated, or the cover is more extensive than people really need,” he says.

£5,000 is better than nothing

Consumer watchdog Which? believes the insurance industry needs to be more proactive in this area, both in tailoring the right policies to the needs of low income households and ‘signposting’ or pointing people in the direction of other service providers able to help.

“There are ways that people can get cheaper insurance, but they don’t know what they are,” a Which? spokesman says.

Part of the problem is that insurers are themselves limited by the extent to which they can reduce the value of their cover. Walker points out that there used to be a greater availability of cheaper ‘no frills’ products that could meet the requirements of financially constrained households at a price they regard as affordable. But the FSA has clamped down on these no-frills products because it believes they do not provide adequate cover.

It is a stance that frustrates the sector. “If the cost of replacing contents is £10,000 and we can offer £5,000, according to the FSA this means we are not meeting the needs of the customer,” Zurich’s senior technical manager Paul Iverson explains. “But we would argue that we are providing something when 5.41 million in the UK people don’t have anything at all. We argue that £5,000 is better than nothing.”

He adds that this places restrictions on how much the insurance sector can do to ensure a greater availability of affordable products.

But not all agree. The Co-operative’s Mooney argues that most insurers are able to sell a core basic product by allowing customers to reduce their premium and increasing excess. “This at least allows some protection rather than none all. That capability is there. Most insurance products in the market have that flexibility,” he says. “It is a question of whether insurers are doing enough to maintain that minimal level of cover with customers before cancellation happens.”

Trust in us

O’Connor believes that the sector and housing providers need to forge closer partnerships to overcome the barriers posed by social exclusion. Moreover, he believes greater investment is needed by both the insurance and local authorities in helping people gain a better understanding of their finances and insurance requirements.

Social policy researchers have long pointed out that there is a causal link between poor literacy and social exclusion, meaning that many low-income households struggle when presented with a lot of text-heavy forms. In addition, CIH research shows that social housing tenants often cite a lack of trust in insurance companies as part of the reason they do not take out cover.

Work is afoot on tackling these issues, however. The ABI has started to provide one-day seminars to train housing officers on how to promote insurance to tenants, and 80% of housing associations now provide some form of home contents insurance policy – although take-up remains at around 20%.

In addition, social housing landlords are using a carrot and stick approach to incentivise more people to take up insurance. In some housing associations, housing officers have started to ask tenants to sign disclaimers, saying they have refused the offer of insurance and consequently cannot expect the association to cover the cost of any damage that occurs. In some cases, O’Connor says that incentives as simple as offering a Marks & Spencer voucher can increase the take-up of cover.

In the marketplace, Zurich, RSA, Aviva and JLT provide specialist schemes to social housing providers, where tenants have the option of paying their premiums with their rent (see ‘How the sector is helping’, below). But the take-up of such schemes remains low. Zurich has recently introduced a scheme that calculates premium on the basis of how many bedrooms a property has.

Iverson admits that the reception so far has been disappointing. “The take-up from housing associations has been limited, and the take-up from the tenants in those associations that have come to us is equally limited,” he says.

Social obligation

Unsurprisingly, one of the main problems is that the hard-pressed social housing sector is loath to take on the additional responsibility and cost of training staff to promote insurance. On the other hand, Zurich’s Iverson explains that if the insurer or broker takes up this responsibility, it is an additional administrative burden and cost that it could do without in the current economic climate. These barriers, in addition to the FSA restrictions on no-frills products, mean that reaching out to financially constrained households will remain a tough call.

Currently, The Co-Operative Insurance is donating £5 to Shelter for every housing insurance policy sold. Mooney believes that, despite the challenges, it is the insurance sector’s responsibility to take on the challenge of running similar initiatives or finding a way to provide the right products.

“I think from a social responsibility point of view there are major social consequences to a lack of insurance or under insurance. While having a minimal level of cover in place may not generate a significant profit margin for insurers, it is the responsible thing to do to,” he says, adding: “It is possible with most products to adapt them to suit a minimal need, which would help reduce the problem of non-insurance.”

The message is clear. It is the season of good will – and if the insurance sector can work towards cracking this problem, it could help a greater number of households to look forward to better Christmases in the future. IT

Can’t pay, won’t pay

Will Kyanaston, 26, works as a billing analyst for construction company Carillion and earns £18,000 a year. He estimated that his personal belongings could be worth as much as £5,000, but he believes he is unable to afford the additional cost of insurance. “It is not a necessary expense. I would like to have it but it is difficult to afford it because I don’t earn a huge amount of money. I have to prioritise what my outgoings are.”

Kyanaston says that he is unable to find home contents insurance for under £100 per year. But he adds that he would consider taking insurance out if it cost £50 a year. “You can equate it to a £1 a week, so on a monthly basis that is affordable.” He adds that the insurance sector does not make enough effort to promote the available options.

He feels that there is greater publicity about other products, such as car insurance. “If the consequences of not having home insurance were stressed through more advertising, that would give people a wake-up call,” he says. “If I kept receiving warnings over and over again, and it was drilled into me how necessary this insurance is, I would end up getting it because I would think it is the right thing to do.”

How the sector is helping

Zurich Municipal has launched a new scheme to help widen access to home contents insurance for social housing residents. The premium is calculated on the number of bedrooms the property has. This removes the need for tenants to calculate an overall value for their home contents, which, if underestimated, could leave them vulnerable to being underinsured.

A weekly cash payment option has also been incorporated to help tenants insure based on what they actually need rather than what they can afford. Policies can also be bought and administered over the phone.

Jardine Lloyd Thompson (JLT) Tenant Risks provide schemes for affordable home contents insurance to over 700 local authorities and registered social landlords across the UK. Premium levels vary depending on the area of the country and the sum insured required. If premiums are paid on a fortnightly basis, each instalment could be as low as £1.17, but the annual cost works out lower if paid annually. Some landlord schemes, paid along with the rent, start from as low as 34p a week.

The broker can either collect premiums on the landlord’s behalf or from the tenant alongside normal rent payments. Where JLT is asked to administer a scheme, it offers weekly, fortnightly or monthly cash payments via the Post Office, or Pay Zone outlets using a swipe card.