Insurance Premium Tax (IPT) will rise from 6% to 9.5% in November this year. Analysts estimate that the rise will add between £10 and £12 to the average buildings and contents policy, and between £12 to £13 to an annual motor insurance bill.
Jane Connor, managing director of the AA, commented that the additional £17.50 on top of the average quoted shop-around premium - according to the AA’s benchmark British Insurance Premium Index - comes precisely at a time when premiums are beginning to rise once again.
Connor said: “The average premium at the end of Q1 2015 was £530, having fallen from a peak of £742 at the end of 2011, following a significant increase in the number whiplash injury claims and ‘cash for crash’ fraud. They have not yet fallen back to the £493 which was a typical premium at the beginning of 2010.”
Price comparison website, MoneySupermarket.com, suggested that the tax paid on home and car insurance premiums may rise by almost 60%, adding £35 to insurance bills for the average two-car family.
In other parts of the market, the rise will also see private medical premiums increasing by between 7.5% and 15.5% a year. It will also impact employees' taxable benefit, as IPT is included in an employee's overall P11D liability.
The new rate affecting such a wide range of policies is predicted to generate additional revenues for the Treasury of up to £1.75bn a year. The Government has justified the increase by saying that the average cost of premiums has already fallen and that UK IPT is still lower than other EU countries, such as Germany, where it is set at 19%.
Inevitably this has caused concern amongst the insurance industry. The British Insurance Brokers' Association (BIBA) labelled it a ‘stealth tax’. Steve White, chief executive of BIBA expressed his ‘disappointment’ with the move and Simon McCulloch, director of comparethemarket.com, said that his major worry was that the increase would simply be passed on to consumers through higher premiums. He also expressed concerns that it may discourage people from taking out insurance at all.
Insurance companies may be concerned that this increase represents a gradual move towards aligning the IPT rate with the VAT rate, which we have already seen in other EU member states. There is some silver lining in that the announcement of transitional provisions around the rate rise should allow insurers to manage the change with less difficulty than in 2011, the last time there was a rise in IPT.
What does this mean for business?
There is concern that the rise in IPT and the cost of premiums generally could lead to underinsurance for businesses. There is therefore a real need for organisations to consult with their brokers and advisors to consider effective ways to mitigate the increase, for example higher deductibles and levels of self-insurance.
Businesses must identify their risks both current and emerging and implement robust strategies to manage these effectively. The costs of accidents and incidents can often highlight areas of under insurance but if the horse has already bolted the business has to play catch up to recoup its losses. It would be more effective to have in place strategies for managing risks and identifying weaknesses in systems before an event occurs in order to address these risks and develop plans to avoid and mitigate the losses. Such strategies make good business sense at any time but focus on these could increase because of the rise in IPT and the impact this will have on the industry.
Helen Devery is the Head of the Broker Sector at BLM
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