Thursday 1st June 2017 marks the third increase in Insurance Premium Tax (IPT) for general insurance premiums in just 18 months, doubling the rate charged since 2015.
The new IPT rate for affected policies will be 12 percent, up 2 percentage points from the 10 percent currently charged. The rate charged in 2015, before recent increases, was 6 percent.
According to the British Insurance Brokers' Association (BIBA), the latest hike is set to affect 27 million households, 17 million drivers and the majority of businesses, with a likely increase in insurance premiums expected as a result.
When Treasurer Phillip Hammond announced the IPT rate change in the 2016 Autumn Statement, BIBA declared it a ‘hammer blow for the hard-pressed’. A more recent BIBA member survey reveals that the increase in IPT is forcing both personal and business insurance consumers to consider reducing or foregoing necessary cover.
The government has since hit insurers with a double whammy at the turn of this year by announcing disputed changes to the Discount Rate (or Ogden Rate). This affects the level of compensation offered following a successful personal injury claim.
The Association of British Insurers (ABI) slammed this particular change as "reckless in the extreme," stating that claims costs "will soar" with the Discount Rate change leading to an "inevitable" increase in the cost of motor and liability insurance policies as a result, affecting both personal and business insurance policies.
While it is too early to fully appreciate how the latest increase in IPT might affect consumers, it is important to place some context around the upcoming change and how it will be applied to insurance policies.
Understanding the latest tax hike
Any insurance policies that are taken out for the first time or renewed on or after 1st June 2017 will be subject to the IPT rate of 12%, with the following caveats:
- Any midterm adjustments (MTAs) that generate additional premiums for policies taken out for the first time or renewed after 1st June 2017 will also be charged 12 percent.
- MTAs on new policies or renewals taken out prior to 1st June 2017 that generate additional premiums for those policies will be charged IPT at 10 percent.
- By the government’s ‘backstop date’ of 1st June 2018, all new and additional premiums will be subject to the new 12 percent IPT.
Possible Repercussions of the IPT increase
Following the announcement of the IPT increase last year, industry experts have speculated the following issues may arise after a rise in premiums:
- There could be an increased number of uninsured drivers
- Customers may not insure their vehicles, property or valuables for the full amount (i.e. there will be under-insurance), or they may forego necessary cover altogether
- SMEs may operate without insurance
Additionally, the AA has estimated that average motor premiums could increase by £10 per year, with PWC estimating a rise of £25. This does not include the extra costs that the ABI determines have applied to policies following IPT increases since November 2015, which include:
- An additional £32 for the average comprehensive motor policy with two cars
- An additional £12.50 for the average combined buildings and contents policy
- An additional £12 for the average pet policy
- An additional £52 for the average private medical insurance policy
What has the insurance industry had to say about the latest rise?
According to BIBA, the IPT increase ‘penalises those people and businesses that seek peace of mind and the ability to restart if the worst happens.’ There is concern that the latest increase will most impact upon those already paying more for insurance, including households and businesses in flood risk areas and younger drivers.
Bollington is committed to ensuring that the effects of such rises are kept to a minimum, and we will do all we can to negotiate the best deals with insurers while making sure the quality of your insurance cover is not sacrificed.