The Chancellor must resist any temptation to increase Insurance Premium Tax in next month’s Budget

James Dalton, Director, General Insurance Policy, ABI

The rise in the rate of Insurance Premium Tax (IPT) from 6% to 9.5% announced in last year’s Budget did not grab the headlines. But it has had a very real impact. It has led to a further financial squeeze on millions of responsible businesses and households who have done the right thing and taken out insurance protection.

Insurance is not a luxury – just ask those 15,000 homeowners and businesses who were hit by the floods earlier this winter and who are relying on their insurers to help them get back to normal.This is why the Chancellor must resist any temptation to raise further the IPT burden for businesses and households in next month’s Budget.

Raising the rate of IPT fails insurance customers and society on four counts:

1. It hits businesses. As businesses lead the way in the economic recovery, higher IPT hits their operating costs. Any further increase in IPT by the same amount as last year could add an extra £500 million a year to the insurance bill for the commercial sector. Higher insurance costs pose the real risk that some firms could cut back on their insurance cover, leaving them dangerously exposed to unforeseen events, such as flooding and fire. Or they look to recoup these increased costs by raising the prices of their products and services that are paid for by customers.
2. It penalises responsible individuals and households. Very few UK households will not have at least one of the 50 million motor, household, private medical or pet insurance policies that are subject to this tax. Last year’s rise alone was considered likely to add an extra £100 to the annual insurance bill for an average family with two cars, a pet and medical insurance. Hard pressed consumers do not need the double whammy of an increase in IPT two years in a row.
3. Higher IPT does not square with the Government’s stated intention of reducing unnecessary costs that impact on the cost of motor insurance. The last Government’s reforms to tackle whiplash and excessive legal costs have led, as the industry promised they would, to cost savings being passed on to customers in lower motor insurance premiums. The average private comprehensive motor premium fell between the first quarters of 2013 and 2015 with over £1 billion being passed on to customers through lower premiums. Yet with personal injury claims costs creeping back upwards, a hike in IPT put further pressure on insurance premiums – the average price paid for a comprehensive motor policy rose by 7% to £430 in the last quarter of 2015, as the impact of the tax rise hit millions of motorists immediately following its introduction in November. The Government expects to see the implementation of its latest proposed reforms - excluding general damages from lower value whiplash claims and extending the small claims track limit from £1,000 to £5,000 - to feed through to lower premiums for motorists. However, motorists will not see the benefit of tackling the whiplash epidemic if the Chancellor pushes through a further IPT hike.
4. Nor does raising IPT fit with the Government’s desire to encourage greater self-reliance and less state dependency. Any move that makes the cost of private medical insurance and hospital cash plans more expensive sends out a very mixed message, and would be contrary to the Government’s stated policy objectives. A further 3.5% rise could add £170 a year to the cost of cover for the average family.

The insurance industry supports the Government’s need to reduce the deficit. However, increasing IPT is not part of the answer. Any further increase will only add to the financial burden for millions of households and businesses across the UK, and could lead to some people cutting back on their insurance at the very time when the financial security it brings has never been more important.

Background

IPT was introduced in 1994 at a single rate of 2.5%. It has been raised on four occasions, the last being as recently as November in 2015. It applies to most general insurance products. Life insurance and certain commercial products are excluded. A higher rate of 20% applies to travel insurance and warranties for some mechanical and electrical goods.

James Dalton is Director of General Insurance Policy at the Association of British Insurers

This blog first appeared as an opinion piece in City AM.