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Introducing the 'Rainy Day Exposed'

Press release issued: 17 December 2008

'Exposed?', a new report focusing on risks to financial security from the University’s Personal Finance Research Centre was launched yesterday evening at a House of Commons roundtable discussion hosted by Mark Lazarowicz MP. The report reveals how risks cluster together in ways that can leave people extremely exposed to the worst consequences of the economic downturn.

The independent report, supported by Genworth Financial, uses an innovative technique known as latent class analysis to identify how a range of common risks co-exist among working-age adults, using data from the FSA’s Baseline Survey of Financial Capability.

The 11 risk factors range from being poor at choosing financial products, being an impulsive spender, having low savings or inadequate provision for retirement, through to having no contents insurance or other protection insurance.  The analysis identifies six fascinating profiles that capture the dominant combinations of financial risk and classifies individuals to the profile that represents them best. By considering the profiles of risk these groups were exposed to, alongside the socio-demographic characteristics of the people making up the groups, the research helps point to the trigger points and threats to people’s financial security in these more difficult times.

The findings reveal that: 

· Very few people made sure they were well protected when times were good – in fact just four per cent faced none of the 11 risks.

· Around 12 per cent of people, mostly with dependent children, left themselves chronically ill-prepared.  They typically had no savings, no contents or life insurance, no pension and neither income nor payment protection insurance.  On average, this group faced five of the eleven risk factors studied – the highest of the six segments.

· Another nine per cent also had attitudes to spending and borrowing that left them highly exposed.   In addition to a lack of savings or insurance, most had low levels of financial capability, high levels of borrowing and a tendency to spend on impulse.  These largely younger householders will be most at risk during the economic downturn.

· The largest group of people were rainy day exposed, and it is precisely these people that have been discussed so much in the current economic climate. They tended to hold little or no liquid assets, relying instead on housing equity or borrowing. Any savings they had were held as more risky investments rather than savings accounts.  And whilst they had insured against a loss of income and had some pension provision they are very likely to find it more difficult to meet unexpected expenses now that house prices are falling and credit is becoming more difficult to access.   This group represents 31 per cent of the UK population.

· The other three segments were: relatively secure, future uncertainty and inherently at risk and unprotected.

"It is striking that so many households are not only exposed to financial risk, but are exposed in a number of ways”, said Professor Elaine Kempson, director of the Personal Finance Research Centre, University of Bristol.  “Sadly, many of these people and their families will now be beginning to suffer from their exposure to these risks, particularly where they relate to a lack of protection against expenditure and income shocks”.

“This is a more holistic study than one that focuses on wealth, insurance or borrowing”, said David Lane, regional manager for Western Europe at Genworth Financial’s Lifestyle Protection business.  “Through this detailed analysis of exposure to financial risk, the industry, regulators and policymakers can develop the solutions needed by UK consumers – whether they be new ways to protect against income shock, basic product, savings incentives or carefully designed financial capability initiatives”.

The launch of the report also coincides with the release of the results from the second wave of the Genworth Index of financial vulnerability, developed in partnership with the Personal Finance Research Centre. These latest results show how recent economic changes have clearly had a detrimental impact on the financial vulnerability of consumers in Britain and across Europe as a whole.

"The Index provides the clearest evidence yet that the effects of the economic downturn, combined with the increase in the costs of basic goods and services, have been felt by households across Europe", said Professor Elaine Kempson. "Compared with a year ago, many more British householders are bracing themselves for a decline in their financial position in the coming months. If their fears are realised we are likely to see an increase in the number of British households with very constrained budgets and in the number falling behind with payments on their bills, mortgage and credit commitments."

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