How affordability can boost financial inclusion in insurance services

Financial inclusion is a priority for all modern, innovative businesses. Helping to widen the net to those, who up until now, have been unable to access services and products, and being able to make accurate decisions based on those customers’ information, is an integral part of any strategic plan.

When we think of financial exclusion we tend to focus, quite rightly, on those who are excluded from mainstream financial products such as credit cards and loans. To highlight how substantial an issue it is, Experian estimates there are nearly 6 million adults in the UK who are ‘invisible’ due to a lack of, or limited, data contained within their credit report.

However, financial exclusion has many dimensions and isn’t just limited to those who struggle to access credit. It is a widespread challenge for every industry. For example, in non-credit markets, exclusion can result in unfair pricing if the customer doesn’t have access to online channels or, again, if there is limited data available to the organisation, which makes it difficult to price products fairly.

Financial inclusion in the insurance market

The need for responsible decision making, then, is arguably as pressing in other areas of financial services and not just confined to lending. One area the Financial Inclusion Commission (FIC) has highlighted as being ignored when it comes to exclusion is insurance.

The impact of not being able to secure adequate cover can be extremely serious, particularly for those with lower incomes. Being uninsured, as the FIC states, leaves people unable to plan beyond their immediate future, protect themselves against unexpected financial hardship and enjoy the peace of mind comprehensive cover can bring.

A few sobering statistics to consider. Of those on a salary of £15,000 or less, 60% have no contents insurance and would struggle to replace stolen or damaged goods. We also estimate there are around 16 million people in rented or owner-occupied occupation in the same position – social-rented households are almost twice as likely to be burgled as owner-occupied homes.

For these groups, the consequences of an unforeseen incident, such as fire, flooding or theft could be significant. They could be forced into taking up high-cost credit to fund replacements, or even be unable to pay their travel costs or for the upkeep of their car, leaving them unable to support themselves.

It’s a similar story with car insurance. A third of people have decided not to buy a vehicle due to the cost of insuring and nearly three-quarters (71%) chose increased excess in their premiums to make their policy more affordable, giving rise to the potential of the customer uninsuring themselves if they can’t afford the excess they have.

On top of that, the total cost of owning a car also needs to be considered. Servicing, running costs, the finance package, MOT, and more, can all potentially add strain to an individual’s finances. Younger drivers are often attracted to deals which offer a year’s free insurance but are then faced with higher regular bills when the offer ends, as finance plans last for longer than 12 months.

This presents clear problems. Insurers and customers are at risk if a claim is to be made, and if the car is a write-off, the individual could be left in a financially distressed situation.

Affordability driving better outcomes

The key to any customer-focused strategy is having the best-quality data and best-quality analytics to interpret and extract insight, quickly and accurately, which helps to drive innovation and results in better outcomes for both the business and their customers.

Affordability is crucial. By being able to understand the true cost implications of vehicle ownership throughout the lifetime of the policy, it can help both lenders and insurers make a far more accurate assessment of an individual’s affordability.

The benefit of this is two-fold. The insurer is working in the best interest of the customer, and at the same time minimising the risk of them not being able to pay, strengthening the relationship between both.

Customers as individuals

Whether it be credit, insurance or any financial services provider, what is emerging is the need to treat customers as individuals – and design products and propositions around them accordingly.

Thanks to Open Banking technology, we can gain valuable insight into their behaviours, identifying gaps in their cover, if they’re in a vulnerable position, and make more accurate assessments about what that person can afford based on their financial situation.

The Financial Inclusion Commission suggests that ‘those on low incomes could insure their possessions for around 33p a day if simple, low-cost ways could be found to reach them’ – and it is within the industry’s grasp to do just that and fundamentally change the market for the better.

With competition on the rise, and new companies upending the traditional model, this new approach doesn’t have to be blue sky thinking. By understanding customers better, the burden of financial exclusion can be lifted, helping providers offer the most appropriate – and affordable – products and services in a way that hasn’t been done before.