Fixing the financial resilience crunch
19 Dec 2018 - Estimated reading time: 4 minutes
There has been a lot of focus on the financial resilience of households in 2018. Various headlines have highlighted a deterioration thanks in part to economic drivers and not helped by the challenges of rolling out Universal Credit. This year there have been reports of nearly 4 million adults, or 1 in 14 Britons, having to use a food bank.1 That’s a rise of 13% in a year. Another indication of resilience is the rate of savings. The latest government figures show that the average household savings ratio in the UK is 4.4%. That may not sound so bad, given it bottomed out at 3.4% in Q1 2017, but when you look back, it is still well below the historic average of 9.4% over the period 1963 to 2018.2
So what can be done to improve the financial resilience of households? There is no doubt the government has a big role to play in providing some relief, and hopefully the further delays to the rollout of Universal Credit this year will help those on the brink. The economic environment and employment levels obviously play a big part too. But another important way to improve the financial resilience of households has got to be through education and awareness. Helping consumers understand the things that are in their control could go a long way to preventing even more households having to rely on food banks for example. This is where financial service providers have a role to play. In the rest of this article we explore some of the ways this could be done. For example, highlighting the risks that can reduce the financial resilience of households, creating ways for consumers to measure their resilience, and promoting various ways they can improve resilience.
Higlighting the risks
While many people insure their homes, relatively few insure themselves or their families against the risk of unemployment or illness. This is partly because people think it won’t happen to them. But partly because they don’t understand or haven’t given much thought to the risks they face. For example, we know that each year one million people in the UK find themselves unable to work due to injury or serious illness according to Associate of British Insurers’ research, and it is widely accepted that people who are off work for more than six months through sickness, have only a 20% chance of returning to work in the next five years. Can we be doing more to highlight these risks?
Customers are also unaware of the financial impact of life changing events, like having a family. One study from LV= showed that almost half of mothers had either been forced to go back to work earlier than they would have wished or taken on extra work to help meet the cost of raising a family. Another trend likely to affect the financial resilience of households is the role families play in providing care for older relatives, with almost 8m people already providing un-paid care, this is only set to rise in the years ahead.
Stopping or reducing work for whatever reason is likely to have a significant impact on the financial resilience of households. However our own research highlights how being in work does not guarantee financial resilience. We found that 23% of people said their salary or benefits did not allow them to live without substantial financial worries. It means income alone is not a good predictor. So what else can we use to predict or help customers measure resilience?
Typically we might think about measuring financial resilience by looking at the level of savings consumers have, or the amount of coverage these savings might have for say 3 months of spending – enough time to find a new job for example. Another way, which many banks and credit cards favour, is to look at spending on essentials and servicing debt, relative to overall income. An increasing trend towards “buy now, pay later” when making bigger purchases like cars, and a shift to more subscription business models e.g. Amazon Prime, Netflix, means that the regular committed spend of households is gradually creeping upwards and putting financial resilience at risk.
These measures of resilience can be quite short-term though, and it is also important for consumers to think about the long-term. What income and spending might they have in retirement, and how resilient will they be to unexpected financial costs like care?
It’s not all about finances either and ‘soft measures’ such as family networks and financial capability can also play a role in how resilient households are to dealing with unexpected situations.
Improving financial resilience
When it comes to improving financial resilience, there are various ways insurers can help customers, including:
- Understanding their own financial resilience using interactive questionnaires, calculators or voice based apps.
- Providing customers with hints and tips on practical things they can do to manage their money.
- Developing programmes that incentivise and reward customers for improving their financial resilience.
- Helping customers navigate the various financial products they can use, and also what mix of savings and insurance is right for them. Our own research shows when it comes to preparing for unexpected costs or events, 68% say it is important to insure while 82% say it is important to save.
With all of the above initiatives, we believe technology will play a very important role in effectively engaging customers. In fact, we have been working on some exciting new propositions and partnerships in this space that we think could play an important role in improving financial resilience. If financial resilience is an area you and your business are interested in exploring, then we would be delighted to speak with you.