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Is low-income insurance really too hard to bother?

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Insurers dissecting the recently released review of the General Insurance Code of Practice will hopefully pause to consider independent reviewer Ian Enright’s views on accessibility and affordability of insurance for all Australians.

While he touches lightly on the subject – it wasn’t a central part of his review brief – Mr Enright notes this issue “has never been more problematic nor its solution more vital in the context of significant community risk but significant underinsurance”.

“There is a related and growing demand for simple products,” he says. “With greater public and political attention being given to equity issues and the larger numbers of people who are seniors or disabled, concern is growing about access to general insurance for all members of Australian society.”

The reviewers of the review should refer to a report published at much the same time that takes the issue further, proposing some solid solutions in an attempt to open up insurance to the disadvantaged and low-income earners.

Church-based Good Shepherd Microfinance has been working on the issue for some years – ironically with the strong financial and material support of the National Australia Bank.

Its report – Covering the Essentials: Increasing Access and Affordability of Insurance for People on Low Incomes – moves past identifying the causes of non-insurance and underinsurance in Australia to recommend practical remedies.

It points out that people on low incomes are least able to absorb losses or easily replace lost assets, while access to affordable cover is often made more difficult by insurers’ reluctance to be more flexible.

And that’s a message that comes through loud and clear in the microinsurance report: without insurers being willing to help, there will be no progress.

“There is a range of options for improving access and affordability, including fortnightly payments, community-rated policies, group insurance, community sector distribution, not means-testing policies and online sales,” the report says.

It identifies home contents and motor vehicle insurance – the so-called “low-hanging fruit” that most people need – as the most important areas requiring innovative approaches to increase access and affordability.

Good Shepherd Microfinance published a discussion paper in May that examined the low-income insurance issue. This latest report includes feedback on that paper from a range of sources, including insurers, community sector legal centres and government agencies.

The feedback showed the most important areas of focus for all stakeholders were access to fortnightly payments; the need for further research in areas such as market size and distribution channels; a focus on home contents “while harbouring concerns about motor vehicle insurance access”; and acknowledgement that many of the often-cited regulatory barriers are less serious than suggested.

“There is clearly interest and the opportunity to introduce insurance products specifically designed for people on low incomes in Australia, although there is still some uncertainty regarding market size and interest for various products,” the report says.

“This should not stymie the pursuit of more accessible and affordable insurance, but be used as an opportunity to conduct research into the non-insured market and find ways of making it more resilient to losses.”

Good Shepherd Microfinance has called for expressions of interest from insurers and other organisations “interested in partnering with us to increase access to affordable and appropriate home contents and motor vehicle insurance for people on low incomes”.

The insurance industry has engaged in this area before, but progress has been slow. The disadvantaged and people on low incomes have to some extent been bypassed by a system that concentrates on easier business.

Microinsurance relies on the willingness of insurers to bend a little. Low-income people can’t afford an annual premium, and need to pay a low premium fortnightly rather than annually. The policies they need protect them against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved.

The report says the Australian general insurance market’s wide range of insurance products are simply not purchased by many low-income Australians. 

Events that cause people to become impoverished and suffer significant setbacks in their economic wellbeing are business failure, death of the main breadwinner, fire, flood, hail, storm damage, theft, total and permanent disability, unemployment and vehicle damage.

“The loss of assets essential for economic participation was also raised, with vehicles being the most obvious example, but this also includes tools or other equipment, especially for the self-employed, tradesmen and apprentices.”

Many respondents to the report provide examples of possible disadvantages and risks associated with insurance for people on low incomes. They list four main concerns: affordability, unsuitable products, products with ever-rising premiums and poor-value products – specifically funeral insurance and consumer credit insurance. 

Respondents from outside the insurance industry were very clear on the need to separate non-insurance, underinsurance and exclusion as separate issues, and treat them as such.

There was general agreement that non-insurance is more to do with affordability than financial illiteracy, and the report calls on the insurance industry to share information to foster better understanding of the reasons for and impacts of non-insurance, underinsurance and exclusion.

Responses received from outside the industry “overwhelmingly” gave the introduction of fortnightly payments as the most important step in increasing access to various forms of insurance.

While many also advocated Centrepay being adopted by insurers – especially in conjunction with the introduction of products designed for low-income policyholders – making fortnightly payments available for traditional payment methods was seen as a leading priority. 

Some insurers do offer fortnightly payments by direct debit on certain products – most commonly funeral insurance. “Some of the brands that offer this also offer general insurance products such as motor vehicle, home and contents insurance, but not with fortnightly payments.” 

The report says there may be difficulties with using Centrepay for home contents policies if the annual premium is below $260, because the current fortnightly minimum of $10 would not be possible over 26 fortnights. This is unlikely to be an issue for motor vehicle insurance.

One solution to this problem could be for Centrelink to allow payments of below $10 a fortnight. But Centrepay fees could consume more than 10% of the premium, because Centrepay payments have a 92 cent administration fee that cannot be passed to the customer.

The report also notes interest from outside the industry in the Insurance Council of Australia’s financial inclusion committee, although one respondent says “tangible industry leadership rather than rhetoric on addressing financial inclusion concerns is necessary”.

There is an acceptance that insurance products for people on low incomes will require a break-even premium. Some respondents to the discussion paper called for such products to be cross-subsidised by more profitable lines.

The Good Shepherd Microfinance report is a good barometer on the issue of low-income insurance. It deserves serious consideration, because loss of assets is by no means “micro” to the households that experience them – and nor is the difficulty they experience replacing lost assets or having their vehicles repaired.