On 8th July 2015, George Osborne,
Chancellor of the Exchequer, delivered his Summer Budget 2015 to Parliament.
One of the most controversial and unexpected measures of the Budget was
Osborne’s 56 per cent increase to the Insurance Premium Tax (IPT), a tax on
general insurance premiums. Considered a necessity by the government but a
surprise ‘stealth’ tax by industry insiders, the IPT increase has caused
consternation and confusion. Who will absorb the increased tax on insurance,
and how will the IPT hike influence premiums?
The IPT increase applies to some insurance premiums starting on 1st November 2015 and all qualifying premiums on 1st March 2016. The higher rate of 20 per cent, which applies to some policies (such as travel and vehicle insurance) will remain the same. Other policies, such as long-term insurance, insurance for commercial ships and aircraft, and insurance for risks located outside the United Kingdom, are exempt from IPT altogether.
But, retaining the occasional exemption has done
nothing to assuage the industry’s fears. Although the IPT applies only to
insurers, industry insiders allege the increased costs will be passed onto the
consumer, resulting in higher premiums, increased pressure on the NHS and more
uninsured drivers due to policies such as private medical and motor being
priced out of consumers’ reach. Indeed, the Association of British Insurers
(ABI) estimates that the IPT hike will add £9.48 to the average annual
household insurance policy and £12.25 to the average annual comprehensive motor
policy. Other estimates have been more liberal, with some experts calculating
that the average policyholder will pay an extra £17.50 as a direct result of
the IPT hike, and others estimating that private medical insurance premiums
will increase by between 7.5 and 15 per cent.
In
addition to the anger over the economic impact, some industry insiders feel
ambushed by the tax hike since they had no warning. The British Insurance
Brokers’ Association (BIBA) was ‘extremely disappointed’ in the IPT hike and
labelled it a ‘stealth tax’. Industry insiders feel that the IPT hike is
especially unexpected given the recent cooperation between the government and
insurance industry which resulted in a 3 per cent reduction to home insurance
costs and a 2 per cent reduction in motor insurance costs, according to the
ABI. The Automobile Association (AA) even went so far as to say the tax hike is
‘underhand’ and ‘unfair’.And most consumers agree—87 per cent of motorists responding to a recent AA survey believe that the IPT hike is unfair.
The government, however, will not concede. Osborne
maintains that the tax hike will only apply to one-fifth of all premiums and
that the new IPT rate is still lower than other European countries’ rates, such
as Germany’s 19 per cent IPT and Italy’s 21.5 per cent IPT. Osborne is further
emboldened by the government’s recent crackdown on Britain’s ‘compensation
culture’, which has helped to lower premiums across the board, according to the
Financial Times. Along with the IPT hike, Osborne pledged to cap charges earned
by claims management companies, which insurers say encourage people to make
bogus claims and thereby raise premiums for everyone.
Some experts believe that the industry will just have
to endure the increase, since soft market conditions should prevent insurers
from passing on increased IPT costs to consumers. But, they caution, absorbing
such costs without passing them onto the consumer could lead to insurers
dropping affected insurance products, thus, reducing competition and
subsequently hardening the market.
One thing is for sure—the IPT hike will raise
insurance costs in 2016. What remains to be seen is whether the industry will
pass these increased costs on to the consumer, and, if so, whether these costs
will be negligible.
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