The industry is responding to government pressure to provide insurance products to low-income homes. Ellen Bennett reports on its progress
The council housing estate with burnt- out cars in the driveways, syringes in the gutter and menacing youths hanging around outside the boarded-up corner shop is hardly an insurer’s natural habitat. But if the government has its way, the insurance industry will soon be marketing a raft of products to low-income households – and, according to the ABI, could even making money out of it.
Under the worthy banner of “financial inclusion”, the government is pushing the financial services industry to make products available, and understandable, to those communities which have traditionally fallen outside its remit.
It has set up a financial inclusion task force, which has in turn set up an insurance working group, chaired by Royal & SunAlliance’s UK chief executive Bridget McIntyre, to look at what products will be financially viable for both insurer and insured, and how they can be distributed.
As economic secretary Kitty Ussher pointed out to delegates at last week’s launch of the ABI financial inclusion strategy, low-income households are caught in the double bind of being more likely to fall victim to crime, and less able to deal with the financial consequences.
“It’s entirely wrong that the poor should be paying more when things go wrong [and they don’t have insurance], just because they are poor,” she says.
So far, so New Labour. But mindful of the need to get businesses on side, the government, and its task force, are also adamant that there is money to be made in the tower blocks and terraces of Britain’s poorer communities.
The task force has decided that extending home contents insurance is the most pressing need, and is encouraging the expansion of low cost schemes for social housing tenants. John Smeaton, head of property underwriting at Norwich Union, one of several major insurers to offer such schemes, says: “We would always look to have a margin of some sort in any business,” although he admits that given the very small premiums, sometimes as little as £1 a week, that margin can be quite low.
Insurance with rent schemes, where the social housing tenant pays a small premium to their landlord, together with their rent, each week, are one of the main ways of reaching those on lower incomes. These schemes have lower entry levels than traditional home contents insurance products, and usually no excess.
Royal & SunAlliance, one of the largest providers of insurance with rent schemes, spreads its risk across rating districts, meaning that people pay the same premium from house to house and even street to street, so those in the most crime ridden street are not penalised. Because the premium can be paid each week in cash to the landlord, the schemes are accessible to people who do not have bank accounts. They can also be marketed, through the landlord, to communities which would usually be beyond the reach of financial institutions.
According to Norwich Union, around 12% of tenants offered such schemes currently take them up. This figure is low, and is something that the government and industry are looking to improve in 2008, through a marketing drive and an increased range of products.
Other ways of reaching poorer communities include working with credit unions and making financial products available through the Post Office, for people who do not have bank accounts.
It is also important that promotional literature is easy to understand – Norwich Union, for example, has set up the website www.makesenseofit.com, which offers simple advice on investment, pensions and insurance.
Significantly, extending financial services can have longer term business advantages. “In a socially mobile Britain, this industry needs routes into the poorest communities, because they may not always be poor,” says Stephen Haddrill, director general of the ABI. “People are likely to move up the income bracket, and we want them to do so with an understanding of what we have to offer, and a loyalty.”
Haddrill also points out that poorer people can make better customers: anecdotal evidence suggests they are less likely to over-egg claims than the more financially confident middle classes.
The insurance industry is also set to benefit from working with the government to extend financial inclusion, because it can ask for something in return. So, if the industry, for its part, markets more low cost products to more people, it can reasonably expect the government to help it cut crime. For example, the ABI has called on the government to include minimum security standards in building regulations, for refurbished as well as new housing, and extend the penalties against uninsured drivers.
Back on the council estate, the reality may look far from encouraging. But government pressure coupled with financial incentives means that insurers may soon be venturing to the wrong side of the tracks.
ABI findings on low-income homes
â€¢ Thirty-five per cent of people in very low income households (less than Â£10,000 a year) have no insurance of any kind, compared to only 5% of households with an average income (Â£15,000â€“Â£30,000)
â€¢ Under half of low-income households hold home contents insurance compared to over 80% of those with average incomes
â€¢ Of those with a low income and no insurance, a third borrow funds to replace stolen or damaged household items, increasing their indebtedness
â€¢ In 2006 households with an income below Â£5,000 were 71% more likely to be burgled than households with incomes of Â£30,000 or more
â€¢ Arson rates are 30 times higher in the most deprived communities than in the most affluent
â€¢ People in the most deprived 10% of the population are eight times more likely to be living in tidal floodplains than other people.