Hidden Costs of Hardship: Shedding Light on the Poverty Premium in Europe

• Individuals who need insurance the most, often struggle to access it. This issue is known as the "poverty premium". It is the extra costs incurred by low-income households when purchasing the same essential goods and services as higher-income households.
• It particularly affects vulnerable and low-income consumers who are left without vital financial protection, as they face higher premiums or even refusals of coverage.
• Factors are often beyond their control. For example, living in high-crime areas may be charged more for household and motor insurance. They are assessed to be at greater risk of their house being burgled or their car being stolen.
• Having limited means, many are forced to opt out of cover or self-insure, perpetuating the issue of being financially vulnerable.
• Insurers argue that individualized risk pricing is fair, while affected consumers need affordable and accessible coverage to protect against unexpected events and losses.

The "poverty premium" is not an overseas issue, it is prevalent in Europe. Europe is challenged by growing "social exclusion" which is a rather abstract term for what is the reality of modest-income households dropping out, falling into debt. It calls for a broader discussion on fairness in insurance. Leading insurances cannot wait for government and regulatory intervention to address these challenges.

Those who need insurance the most are often the ones who are least able to afford it.

In essence, those who need insurance the most are often the ones who are least able to afford it. Insurance is designed to provide financial resilience. Insurance gives peace of mind in the face of an unexpected financial shock. Income shocks, such as illness, unemployment, poverty at retirement, liquidity shortfalls as small entrepreneur.

For more than 7 years, AXA has worked on building a more sustainable social and economic model. Building this model has now become one of three pillars of AXA's new strategic plan Unlock the Future.

The issue in Europe

• Vulnerable and low-income consumers often present a higher risk to insurers.
• These individuals are quoted higher premiums for insurance, which they are less likely to be able to afford. In some instances, they are even refused cover.
• In recent months, every fourth European is arbitrating household expenses due to rising cost of living driven by electricity, medical expenses and daily consumption but also essential services such as credit and insurance.
• The average household at the lower European income level pays EUR 200, up to EUR 600 a year extra, as "poverty premium". At the same time, these households are too rich to be poor, yet not rich enough to be helped.
• Insurers, policy makers and consumers have differing opinions about what is ‘fairness in insurance’.

Insurers, policy makers and consumers have differing opinions about what is ‘fairness in insurance’.

For an insurance model to work, the consumer’s premium must reflect their level of risk. In contrast, consumers often viewed fairness to mean that all can access an affordable level of cover that ensures they are protected.

Growing sophistication in data science techniques, have enabled insurers to set premiums according consumer’s individual risk profile. This trend away from broad risk pools and toward more granular pricing based has been associated with risks of increasing discrimination through the individual’s specific rating factors.

However, this is a one sided view. In fact, the insurance sector has proven by now that individualisation of risk to be fairer, as a consumer’s premium reflects their level of risk. Risk-based pricing offers material benefits:

• It can incentivise positive behaviours that reduce risk and benefit of all policyholders as a whole, for example discounts on motor insurance for safe driving (AXA Switzerland).
• Risk-based pricing has enabled a abundance of innovation in insurance to include consumer segments that may have previously been excluded, for example offering a low-cost long term care coverage in markets where only 1% of population could afford such until now (AXA Italy).

The solutions in Europe

Insurers have proposed various solutions. Rightly so, the industry promotes effective insurance practices which secure profitability and players like AXA now strategically align with the goal to remain inclusive. Inclusive is to stay relevant - affordable, accessible, attractive - to the major parts of the European population.

17% of younger people save money and go without car insurance - despite it being a legal requirement.

Proposed solutions are, amongst other,

• creating government-backed reinsurance schemes (similar to Flood Re, such as a Postcode Re or Health Re in UK)
• incentivinzing innovative auto-enrolment through employers, giving access to group insurance
• ending monthly payment premiums for those unable to pay upfront
• removing extra charges on flexible payment options
• introducing clear and simple insurance products as entry options
• launching profitable microinsurances for targeted common risks
• regulators incentivizing innovative solutions that address the poverty premium (FCA’s wider work on fairness in UK insurance pricing)
• product terms that promote financial resilience such as payment holidays, instant cash settlement in case of claims, deferred payment during unemployment.

These discussions are crucial, with younger people, seniors, smaller entreprises or low-wage workers being forced to opt out of cover, reduce cover, or ‘self-insure’. Yet progress is not advancing fast enough. Falling into poverty is not an option for Europe.

This is not about charity. This about consumer insights that show lived experience of slowly showing lack of cash at the end of the month. Such that, recent studies show 17% of younger people go without car insurance despite it being a legal requirement. Such that, the lack of low entry medical coverages and income protection products call for innovation.

Inflation in Europe raises the question how insurers stay affordable and accessible to the major parts of the European population.

Open questions

Events of the past 18 months across Europe have fueled the discussion. Here are the key questions to answer:

1. Does it require minimum level of protection needed by all for a risk to remain insurable and for all parties to remain financially resilient to specific risks. For example, companies in Italy are required to enter into insurance contracts by December 31, 2024, to cover damages resulting from natural catastrophic events.
2. Government incentivising the insurance industry to develop and deliver innovative solutions to address financial inclusion is crucial. The cooperation in medical health between communities in Paris and AXA France have been a proof-point of joint action.

While the government was traditionally responsible for this, leaders in the insurance can now step up and protect vulnerable to financial hardship.

AXA is now providing insurance protection for lower-income European customers. In 2024, all key markets will introduce an accessible, affordable, and distinctive offering for the smallest enterprises across Europe. Micro-enterprises with zero to five employees have been shown to be most exposed to financial risks. At the same time, they are profitable, experiencing the highest growth, and providing the largest economic value-add in the European Union's SME sector. With their resilience ensured and their businesses protected, AXA anticipates double-digit revenue growth over the next 3 years.

Mirjam Bamberger is a member of the Management Committee of AXA's European Markets & Health. Previously, she served as the CEO of AXA Luxembourg, CEO of AXA Wealth Europe, and held various board member roles at AXA Switzerland. With over 25 years of experience, Mirjam has lived and worked in 9 different locations across the US, UK, China, Latin America, and Europe, holding executive and non-executive director positions within the financial services and high-tech sectors. She holds an Executive MBA with honors from IMD Lausanne, a master’s degree from the University of Cologne, and diplomas from University St. Gallen/Stanford, Cornell, DUW Berlin, and ICMA. Additionally, she is a certified director of the Swiss Board School with NED positions across Europe.