Poorer drivers forced to pay unfair £300 extra on their car insurance, experts warn

A general view of the M5 motorway in Worcestershire, as members of the Rail, Maritime and Transport union begin their nationwide strike in a bitter dispute over pay, jobs and conditions. Picture date: Tuesday June 21, 2022. (Photo by David Davies/PA Images via Getty Images)
Less well off drivers are facing higher insurance costs as part of a 'poverty premium', campaigners have warned. (Getty)

Campaigners are urging the government to protect millions of people at risk from a "poverty premium" which can see insurance costs hiked disproportionately for the most vulnerable in society.

Research conducted by the Social Market Foundation (SMF), supported by Fair By Design, found that insurance is becoming increasingly unaffordable for those on low incomes as they are charged “a poverty premium” – meaning they pay more for insurance cover due to reasons they cannot control, such as where they can afford to live.

They have called for the government to prevent the practice that sees people on the lowest incomes "pay more for being poor".

The report said that people on low incomes can pay up to £300 more on car insurance than better-off drivers simply because of their postcode. People in poverty or on lower incomes also pay more for their insurance cover because they can’t afford to pay for it all in one go.

Additional charges for paying for car insurance monthly instead of annually could mean an extra £160, leaving people struggling to stay afloat during the current cost of living crisis.

Applying for a UK Car Road Tax requires, in addition to the payment, a valid Certificate of Insurance, an MOT Certificate if the car is more than 3 years old, and the Vehicle Licence Application form, as shown here. The 3 road tax discs for 2008, 2009, 2010 have had their serial numbers removed. Driving a car without a valid Road Tax displayed is illegal. .
Car insurance premiums could cost up to £300 more for those with the lowest income, a think tank has warned. (Getty)

Fair By Design directore Martin Coppack said: “Insurance helps us weather all kinds of financial storms. We all want to feel like we have a safety net.

“But we have two types of markets. One that works for the heathy and the wealthy, and one that penalises people for being poor.

Read more: Police officers 'using food banks' as they struggle to heat homes and feed families

“Sometimes we have to have insurance, like motor insurance, which is a legal requirement. For motor insurance, you can pay hundreds of pounds more simply because of where you can afford to live – no matter your claims history.

"What’s more, if you can’t afford to pay your insurance all in one go, you can end up paying well over another hundred pounds.

“The government says this is a job for the financial regulator to consider, while the regulator says this is something the government should sort out.

"We are stuck in a continual policy ping-pong, while those on the very lowest incomes continue to pay more for being poor. This is why we are calling on the regulator to investigate the poverty premium in the insurance market to put an end to this stalemate.”

What is the poverty premium?

The so-called “poverty premium” refers to the extra costs people on low incomes and in poverty pay for essential products and services, such as insurance. It also has a knock-on effect on insurance take-up, which is already low amongst lower income families.

This can leave people unprotected against life events that could push them to the edge. The SMF estimates that five million people in poverty would find it impossible to pay for an unexpected cost of £500 without outside assistance. Over the next five years, an estimated two million people in poverty could have to face an insurable loss.

Warnings of a 'poverty premium' come at a time where millions are already cost-cutting due to the cost of living crisis. (Getty)
Warnings of a 'poverty premium' come at a time where millions are already cost-cutting due to the cost of living crisis. (Getty)

The SMF found two distinct reasons for people on low incomes paying more for insurance.

It found that, at times, some of the higher price can be explained because less well off people are seen as facing higher risks. This could be because they might live in areas with higher rates of crime.

However, poorer people also pay higher prices because of other factors, including the premium paid to meet insurance costs monthly rather than in a lump sum. Also, many people in poverty have single-item insurance policies, which would be more cheaply provided through a household contents policy.

What are campaigners recommending?

Amongst other recommendations, the report calls on Ministers to consider a range of measures, including state-backed insurance products for people on means-tested benefits or low incomes, and insurance vouchers – like childcare vouchers – for people on means-tested benefits or low incomes.

They also called for the introduction of stricter regulation on pricing, such as greater oversight by regulators and the banning of certain rating factors, and a significant reduction in insurance premium tax (IPT).

Researchers surveyed more than 1,500 adults from low-income households in the UK, and focus groups with people living in poverty. The research found that just 7% of people believe that it is fair that those on lower incomes pay more for their insurance, and the majority (66%) believe that it is unfair.