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The cost-of-living crisis is affecting every business in the UK – including insurers

So, what is the squeeze in real income likely to mean for the sector?

The post-pandemic picture

Financially, a significant proportion of UK consumers have come out of the pandemic in reasonable shape. With fewer opportunities to spend or socialise, and support from the furlough scheme, many people saved their cash. Unsure of the future and with lenders removing products from the market, many also reduced borrowing.

Positive balances held in current accounts increased by £200 million over the pandemic. The big paydown saw people reduce their secured and unsecured lending balances: consumers paid off around £18 billion of credit-card debt alone, sending it to a low point of £52 billion.

Yet the cost-of-living crisis – primarily fuelled by energy price rises – is beginning to bite. Savings amassed during the pandemic are dwindling – especially among lower and middle-income groups. Indebtedness levels are creeping up.

Reliance on revolving credit facilities is increasing. According to our credit bureau data, credit card balances are climbing again, over £2bn has been added to balances since March 2022. Overdraft usage is up by 17% from a low point in May 2021. There are now 4.7m who have an overdraft, which is up by more than half a million since December 2021. 350k of these are in excess of their limit with a further 1m customers who are overdrawn without facility which again is up 250k from Dec 2021.

We have also seen a rise in arrangements. Brexit, the COVID-19 pandemic and now the cost-of-living crisis, are all impacting consumers. So much so, that the number of consumers making payment arrangements with their providers has increased from 70,000 per month, to around 110,000 per month – a rise of 40,000 people per month.

Having just come through a massive period of instability, people are now facing the prospect of real financial stress. The number of Credit accounts in arrears is up almost 10% since the start of December 2021, and we can expect worse to come.

A more significant impact is expected with further energy-price increases, continuing fallout from the war in Ukraine and pandemic recovery all contributing to inflationary pressure.

The impact on insurance

So, what can insurers expect from consumers? And how can they help customers cope with what’s been described as the ‘worst cost of living crisis since the 1950s’1?

A shift to basic products?

As finances get stretched, customers are likely to choose the most basic products and levels of cover. Price parity, introduced in January of this year, effectively reduced the savings available if you change your insurance provider, and has already impacted the type of cover people choose.

Facing a further squeeze, consumers are increasingly opting for basic insurance products and topping up with particular value adds – such as a courtesy car. This is a trend that we’re likely to see grow. More people may decide to forgo protecting a no claims bonus and seek to reduce their premiums with higher excesses.

In this environment, insurers need to be very clear about what is (and isn’t) included in their policies. Customers contact insurers at some of the most stressful times in their lives. Discovering that they’re not covered, don’t have enough cover to replace or repair items, or face a more significant excess than expected adds to the stress.

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Affordability issues?

The major insurance purchases are not discretionary and that makes affordability essential. Although some may be tempted, consumers can’t – and mustn’t – simply stop buying motor insurance or buildings insurance in the way they may choose not to renew their pet or dental insurance.

The Catch-22 here is that many consumers are locked out of accessing the very thing that could make insurance premiums more affordable – monthly payment by direct debit – because insurers are currently grappling with affordability assessments.

With household finances squeezed and savings exhausted, more consumers will want to pay by direct debit to help manage their monthly outgoings. But because the industry treats direct debit as credit, affordability will mean that those customers with the most to gain from spreading the cost of their premiums are only given the option to pay by lump sum.

Insurers need to evidence due diligence in assessing affordability and work hard to ensure they offer the right products with suitable payment options. Alongside the new FCA Consumer Duty guidelines, regulated organisations need to consider how they measure affordability and build this consideration of a consumer’s capacity to afford their insurance policy throughout the life of the agreement.

A new landscape requires new tools

The cash cushion many consumers built up over the pandemic is disappearing. Spending patterns are changing. The insurers who thrive as the crisis bites will be those that adapt to help customers best manage this new reality. That means using new tools to navigate a new landscape – using data insights to make the best decisions at application, and to offer products that work for increasingly hard-pressed consumers.

You can find out more about our data insights for insurance here.


[1] UK heading for worst cost-of-living crisis since 1950s, says economist, The Independent