The Poverty Premium could drive more Commission Transparency

These figures come from a recent Social Market Foundation report on the poverty premium in insurance – the amount by which people on low incomes pay more just because they’re on low incomes. What struck me about those two figures was how high the premium finance aspect was relative to the policy premium itself.

Stirred But Not Shaken, Yet

It was interesting that the Social Market Foundation (SMF) raised premium finance as a significant contributor to the poverty premium but didn’t then explore it further. That may not last. During an online discussion of their report, a Member of Parliament put premium finance at the top of her list of issues needing to be examined (more here). It’s unlikely then to be an issue that sits quietly in the background. Better then for insurers to be prepared for the obvious questions that it raises.

Two obvious questions associated with premium finance that insurers need think about within the context of the poverty premium are commissions and credit scores. Let’s look at each now.

Quote Flexibility

Premium finance is usually packaged separately from the policy itself. On the face of it, that would be because not everyone wants to pay monthly. What matters more to insurers however, is for their insurance quote to appear towards the top of the screen, preferably in the top three. To keep their premiums as low as possible, insurers often subsidise their quote premium through earnings from their premium finance offer.

The levers for doing so can be found in the commissions built into most policies and premium finance arrangements. These commissions are high. Forty percent would not be considered large in terms of insurance policy commission. Some of you would think that this pays for the servicing of the quote and policy, but remember that this is now an array of renewal, amendment and cancellation fees for this.

For many years, the sector has pushed back against greater transparency around commissions. This would have seen commission amounts directly referenced alongside premiums and cover. The argument against this has been that there’s no consumer demand for this information. For sure, some customers are just interested in the bottom line, but there are situations, and the poverty premium is one of them, where the wider public interest could sweep such arguments aside.

The poverty premium is an issue likely to be around for a number of years. And I believe that over the next year or two, we are likely to hear harder and harder questions being put to insurers, brokers and price comparison websites about the commissions and fees being earned. Should the lid be lifted on them, then policy makers will, to be brutally honest, have a field day, spurred on by civil society groups.

For this reason, insurers need to start modelling the outcomes of varying challenges around commissions and fees. It’s likely that this is something they’ve already been doing as part of their value work for the consumer duty. The difference, in my opinion, is that the poverty premium issue could introduce much more challenge into the judgements being made around the value of commissions and fees. Insurers need to introduce that challenge for themselves.

The Triple Whammy

The second theme around which questions about the poverty premium will form is credit scores. They’re a triple whammy for people on low incomes because their influence will be felt at the underwriting stage (they’re a common rating factor), at the counter fraud stage (all that talk about the cost of living crisis fuelling fraud) and at the premium finance stage (the perceived default risk).

This gives credit scores an accelerator effect. Once it’s engaged, it does so big time. This makes its impact highly sensitive to how decision dials are set. Each dial setting I’m sure has its own logic, but it’s far from certain that that same logic holds true at the combined level of the overall quote machine.

At the same time, questions about the fairness of using credit scores in insurance are increasingly being raised (more here). The SMF report itself even references the US state of California, where the use of credit scores in insurance is banned. Some of you may thing that it’s just one US state, but in GWP terms, it’s one of the biggest insurance markets in the world.

Together, this scale of impact, and the diversity of opinion about its efficacy in insurance, point to credit scores emerging as a contentious issue in debate about the poverty premium. As with commissions and fees, insurers need to have prepared well thought through explanations for why and how they use credit scores in decision making across all functions – underwriting, counter fraud, marketing and, for good measure, claims as well.

Summing Up

The poverty premium is moving up the policy making agenda, pushed by the influence of think tanks like the Social Market Foundation and research by Fair by Design and the Institute and Faculty of Actuaries. During presentations of their report, the opaqueness around how the sector uses data is an often referenced complaint.

This points to the sector, sooner rather than later, coming under political pressure to deliver explanations and, equally important, the data to evidence them. It makes sense for individual insurers to make a start on this for their own internal audiences. The two measures they should start off with are commissions and credit scores. What’s important is that this process incorporates some level of challenge, in preparation for the robust questioning that policy makers are likely to engage in.