Improving access to affordable motor insurance could boost the UK economy by an extra £369 million each year and help some of the 2.6 million people who don’t drive due to the cost of motoring back to work.
The effect of the poverty premium on people in financially vulnerable circumstances can mean they pay £200 – £300 more for their motor insurance and with claims costs rising over 30% in the past 5 years, premiums are spiralling.
However, the focus on financial inclusion from Government and the Regulator can provide the right conditions for the systems change, greater innovation, collaboration and transparency that will lead to better outcomes for more people.
This week, the Financial Inclusion and Growth report which we commissioned WPI Economics to produce was published, calculating that the UK economy would benefit from an extra £369 million per annum in increased employment by improving access to affordable motor insurance. That’s nearly £1.5 billion over the rest of this parliament. A significant amount of economic growth.
The price of motor insurance has been steadily on the rise and represents the largest insurance cost for the average household. And this week has seen the release of numerous reports and pieces of research, each examining the reasons for these increases and the impact it is having on consumers.
Our segmentation model shows that there are over 20 million people in the UK who are living in financially vulnerable circumstances. In our most recent analysis, we asked a series of questions about car usage which showed how important access to a vehicle – and affordable motor insurance – is to people in financially vulnerable circumstances, relative to the wider UK population.
People in financially vulnerable circumstances are more likely to need their car for work or to get to and from work, and to meet their caring responsibilities, than the general population.[1] This will be particularly so for those living in more rural areas.
We also know from our research that people in financially vulnerable circumstances are much more likely to spread the cost of their insurance by paying for it monthly. This drives up the total price by affecting the risk factors insurers use to calculate that price, compounded by costly premium finance options.[2]
This is just one example of a poverty premium that pushes up prices for certain societal groups, based on circumstantial ‘risk factors’ associated with where they live, their job title, credit score or even what web browser they use.
We are concerned by how many people‘s finances this affects. Citizens Advice have highlighted how employment opportunities can be impacted too – recent research showed that up to 2.6 million people don’t drive because they can’t afford, up 900,000 over the previous 12 months[3] and separately that people of colour are paying £250 more on car insurance per year than white people.[4]
At Fair4All Finance, we are particularly concerned about the impact that price rises have on people in financially vulnerable circumstances and their ability to build and maintain financial resilience. Addressing this topic is not just critical to building individual financial resilience but is also a key economic driver.
A busy week for the FCA
In October 2024, the Government established a Motor Taskforce to help drive down the high costs of motor insurance with a specific focus on those people hardest hit by rising costs, including minority ethnic groups, those on lower incomes, and elderly and young drivers.[5]
Alongside this announcement, the FCA committed to review the impact of increased premiums on drivers. This analysis was published last week alongside an update paper on the progress of the Premium Finance Market Study and an evaluation paper on the General Insurance Pricing Practices. Time to get stuck in!
The increasing cost of claims
Starting with the Motor Insurance Claims Analysis, the FCA report that all the major cost factors that drive claims costs have gone up since 2019 leading to an overall increase in costs of 34%. The biggest cost increases have been seen in property and accidental damage and are driven by issues in the supply chain, more expensive vehicles and parts and Brexit-inspired labour and skills shortages.[6]
It is also important to note that whilst the total number of motor policies has increased during the same time period, the number of claims has actually reduced, resulting in an increase of 37% in the average cost of each claim (from £2,410 to £3,106).
The FCA conclude that these higher premiums have created affordability and access challenges for some consumers – and our data indicates, concerningly, that significant numbers of people are cancelling, reducing or finding it harder to afford the insurance and protection they need.[7]
Also since 2019, there has been a marked increase in the cost of claims relating to uninsured drivers (increase of £130m to £452m) which could indicate an increase in the number of people driving without insurance, possibly due to the cost. This too has a disproportionally negative impact on people already paying the highest premiums.
The cost of claims against uninsured drivers are paid by the Motor Insurance Bureau (MIB) which is funded via a levy on motor insurance companies with the costs distributed, via increased premiums, to their customers. Consumers with a high risk rating are likely to be paying a high proportion of these costs.
The Motor Claims Analysis also highlights a surge in personal injury claims and costs associated with micromobility vehicles such as eBikes and eScooters for which insurance is not (yet) a legal requirement, but certainly something that is adding cost into the system and needs further review.
The release of this data is very welcome and the FCA make a series of strong recommendations that support the need for wide-ranging action and intervention from the Motor Taskforce, the insurance sector and other agencies to address rising costs and focus on better consumer outcomes.
Treating customers fairly
The second FCA document we read with interest the General Insurance Pricing Practices (GIPP) Evaluation Paper (Evaluation Paper 25/2). The paper aimed to assess how effective the GIPP has been in tackling the consumer harms it was designed to address – including ‘price walking’ whereby existing customers were being charged more than new customers, whose prices would increase year on year after an initial introductory offer.
The 2024 FCA Financial Lives Survey reported that 61% of all consumers still switch their motor insurance provider each year. We were interested in whether this was simply down to a lack of loyalty, whether it indicated the availability of better pricing elsewhere or some other factors so the investigation into the effectiveness of GIPP is timely.
The FCA’s analysis of GIPP data shows that pricing for existing customers has increased more slowly than pricing for new customers, indicating that this change has been successful up to a point. However, this doesn’t mean that the system is working well for people in financially vulnerable circumstances.
Which? are running the End the Insurance Rip-Off campaign and have researched how haggling can help to reduce motor pricing quoted by insurers.[8] They found that 59% of respondents haggled with their insurer with 61% of them getting a better price, some achieving a reduction of £200!
We agree with the Which? analysis that this data raises some important questions for people in financially vulnerable circumstances. Which? data shows that people in vulnerable circumstances or experiencing a life event are more likely to get in touch with their insurer to talk about price, but report that they found the process overly complex. They are also more likely to end up with a different product (rather than a simple price reduction).
We also know, from the research of Plain Numbers and others, that around half the adult population (20 million people) struggle with numeracy and are less likely to have the confidence to call up and challenge a price presented to them by their insurer.
One of the key conclusions in the Which? report is to question how insurers can meet their regulatory Fair Value requirement; if a consumer doesn’t haggle then they are surely paying over the odds – and how can this be fair?
We would support work by the regulator and others to investigate this further, and ensure that the initial prices offered are consistent, fair and do not rely on the financial capability and personal circumstances of consumers to get the best deal.
The addition cost of paying monthly
The final publication from the FCA last week was an update paper on premium finance (Market Study MS24/2.2). Initial findings from the study show that consumers are typically paying between 20% and 30% APR for their premium finance but that 20% of consumers are paying over 30%.
What we found most interesting is that more than a third of home contents insurance providers do not charge their customers more to pay monthly (compared to 3% of motor insurers). The model exists as insurers want the money up front to cover the risk for the duration of the policy, but insurers clearly consider this risk differently depending on the product.
Further to this, a recent Treasury Select Committee hearing questioned industry representatives on the default rates across the different products and confirmed that a customer’s choice to pay annually or monthly is used as a risk factor to calculate the premium offered. It was not clear from the discussion the extent to which this would affect an individual quote, but we do now know that there is a compounding of poverty premiums on people with insufficient income who are charged more for selecting a monthly quote and then charged 20-30% extra to pay for this ‘choice’. We welcome the Committee exploring premium finance and the effect it has on pricing and affordability for people in financially vulnerable circumstances, a cross party topic affecting consumers across the country.[9]
So what does good look like?
Increased focus from Government and the Regulator
We have contributed to the development of the Government’s upcoming Financial Inclusion Strategy through our membership of the Access to Insurance Sub-committee. A balanced set of actions in the strategy would mean government, the regulator and industry working together to address the barriers to fair and affordable insurance, not least on motor. Between the Financial Inclusion Strategy and the work of the Motor Taskforce there is the opportunity for tangible cross sector action to improve the choices available and lead to better outcomes for people needing motor insurance to work, live and fulfil their potential.
Consumer groups pushing for positive change
We also welcome the recommendations published by Fair By Design in their position paper Driving Change: Policy Ideas to Tackle the Motor insurance Poverty Premium. Fair By Design pick up on the issue of fair value and set out that more work is required to understand if this is being consistently applied in motor insurance pricing. They also suggest that the insurance sector should establish best practice for how the consumer duty is implemented by firms.
We fully support the drive for better inclusive and accessible by design processes in product development and customer journeys that learn from lived experience. And we believe that an industry wide shift in approach can improve consumer outcomes. And finally, providing consumers with clear and consistent information on how they can reduce their risk profile will help reduce the opacity of motor insurance pricing, and make it more accurate and transparent. But it is not all about improving processes and building trust, we should also be looking at innovative interventions to think about or share risk in different ways like developing social tariffs or provided targeted discounts for certain societal groups, especially those who need their car for work or caring responsibilities.
Fairer Finance have recently published analysis of the motor insurance risk based pricing model and how the lack of transparency, and the way the risk is calculated, works against people on lower incomes.
Based on new data from an online survey, a literature review and expert interviews, the Fairer Insurance Pricing Report makes a series of practical cross-sector recommendations to address the issues of fairness, transparency and lack of trust highlighted by the reports and data described above.
We believe this would be a foundation stone of getting more people into better employment and help to deliver the increased economic output projected in our Financial Inclusion & Growth Report.
Fairer Finance also recommend that the sector becomes more transparent about what risk factors contribute to pricing and that these are standardised, along with how telematics data is used. This will not only make pricing practices more transparent but also fairer for all consumers.
There are also some recommendations which we hope are considerations for the Motor Taskforce, including the identification of insurance blackspots where consumer choice is limited, investigation into social tariffs and targeted discounts and that customers are not charged more for being involved in accidents that were not their fault. I mean, why would they be?
… and finally
It’s encouraging to see that this topic is getting attention from all the key stakeholder groups who need to work together to act.
For example, the ABI have published a motor insurance roadmap and chaired the Access to Insurance Sub-Committee, which included representation from across their membership of insurers, as well as brokers and other industry reps. And we have seen interest from the FCA, government and consumer groups.
Our hope is that it’s now clear that change is required to improve choice and outcomes for the societal groups most affected by increased motor premiums. And that we can find consensus on a series of recommendations that will help to make driving more affordable for more people, offer more and better employment opportunities and contribute to the growth and economic development of the UK.
[1] Fair4All Finance Segmentation Survey 2024. I use my car to commute to and from work: FVC 63% vs. control group 51%. I use my car for work: FVC 16% vs. control group 11%. I use my car to help care for a family member including getting children to school: FVC 28% vs. control group 24%
[2] Fair4All Finance Segmentation Survey 2024. I pay monthly for my insurance: FVC 68% vs. control group 56%. I pay annually from my disposable income: FVC 32% vs. control group 19%.
[3] https://www.citizensadvice.org.uk/about-us/media-centre/press-releases/2-6-million-people-dont-drive-as-they-cant-afford-car-insurance-cost/
[4] https://www.citizensadvice.org.uk/about-us/media-centre/press-releases/people-of-colour-still-paying-250-more-on-car-insurance-per-year-than-white-people/
[5] https://www.gov.uk/government/news/ministers-bring-together-industry-experts-and-consumer-champions-to-tackle-spiralling-costs-for-drivers
[6] https://www.motortradenews.com/sponsored-content/importing-car-parts-to-the-uk-whats-changed-since-brexit/
[7] Fair4All Finance Segmentation Survey 2024. I’ve cancelled an insurance and / or protection policy in the last 12 months: 8%. The cost is making it harder for me to afford paying for an insurance product: 19%. The cost is preventing me from taking out an insurance policy I need: 9%. I’ve reduced the amount of insurance coverage I have in order to make it cheaper” 9%
[8] https://www.which.co.uk/news/article/how-to-win-at-car-insurance-haggling-aoMkK9k0nbgA
[9] Treasury Select Committee 8th July 2025 Insurance Companies Oral Evidence https://committees.parliament.uk/event/24789
