Budget measures affecting insurance premiums

If the rate had risen to the feared 12.5 per cent, this would have represented an increase of 108 per cent over the past six months.

In the event, the Chancellor raised the standard rate of IPT from 9.5 per cent up to 10 per cent- a mere 0.5 per cent. This could raise £700m from the insurance sector over the next five years.

Changes in the Budget that hinder people getting protected is only ever going to increase this gap Paul Reed

Mr Osborne had increased the standard rate from 6 per cent to 9.5 per cent last November in the Autumn Statement.

According to Brian Walters, principal of Cheltenham-based Regency Health, IPT has increased by 66 per cent over the past 12 months.

IPT is levied on everything from home and pet insurance to life insurance and private medical insurance.

Some experts had warned that the anticipated 3 per cent hike could mean the average family in the UK would see their total household premiums rise by up to £190 a year.

Mr Osborne moved to counter claims this “tax on insurers” would be passed onto consumers through hikes in premiums.

On page 55 of the Budget, it says: “If they do pass the cost of this rate increase onto their customers, the combined home and contents insurance would only increase by £1”. However, he did not mention the effect on life and health protection policies, which could become more expensive and act as a barrier to essential insurance.

Mr Walters calls this hike “counter-productive” where private medical insurance (PMI) is concerned.

He says: “It will price people out of the market and place more of a burden on the NHS. The subscriber base for PMI has been steadily eroding over the past few years due to spiralling costs, and the IPT increases will only exacerbate the problem.

“The government urgently needs to look at exempting medical insurance from IPT - as is the case in several European countries - to alleviate pressure on the NHS.”

Paul Reed, protection specialist for Cardiff-based broker Vita, comments: “With the protection gap in the UK already standing at over £2.5trn, changes in the Budget that hinder people getting protected is only ever going to increase this gap.

“This will put inevitable strain on the benefits system when people are unable to pay their bills due to ill health, critical conditions or even death of the main breadwinner.”

He adds another area where brokers will have to have difficult conversations with their clients post-Budget is in unemployment cover, which “will naturally be hit by changes”.

Charlie MacEwan, corporate communications director for Western Provident Association, says: “Insurers and advisers need to be pragmatic about the Budget and recent increases in insurance premium tax. We exist for our customers and need to minimise the impact of upward pressures on premiums.”

Mr Reed adds: “We’ve seen clients had to cancel their policies because the premiums have become unaffordable, leaving more of the population financially unprotected against job losses. In the event of them being out of work, it has an immediate strain on the benefits system.”

Advisers with corporate clients will also have to discuss the possibility of higher premiums for business insurance, at a time when they are already facing changes under incoming Acts of Parliament such as the Insurance Act 2015.

Stuart Bennett, a director of Southport-based online business insurance firm Quote Dave, explains: “This is an increase in tax that SMEs can well do without.

“The rate has gradually crept up over the last 20 years and an increase would be extremely punitive on hard-working business owners who already face multiple pressures running their operations.

“There is a possibility that such a punishing rate of IPT could lead to some SMEs choosing which policies they need to take out instead of ensuring their businesses have the right insurance cover across all aspects of their business.

“Personally, I have always felt it is slightly unfair to apply IPT to compulsory purchases such as Employers Liability Insurance.”

There was some relief in that the proceeds raised from the 0.5 per cent increase in IPT would go towards improving flood defences, something which John O’Roarke, managing director of LV= general insurance, calls a “positive step”.

He adds: “No doubt it will come as a relief to many thousands of households and businesses who have been affected by flooding in recent years.

“However we urge the Treasury to confirm that this move will not set a precedent, and that any future essential infrastructure spending on flood defences will not be paid for by further tax increases on responsible consumers.”

Life insurance policies

Page 107 of the Budget document also states the government was set to consult later this year on changes to the categories of assets that life insurance policyholders can choose to invest in, without giving rise to an annual tax charge under the personal portfolio bond (PPB) legislation.

According to the HM Revenue & Customs, the legislation imposes a yearly charge on policies and contracts that come within the definition of a PPB.

It does this by treating a chargeable event gain as arising on the last day of each ‘insurance year’, other than the final insurance year.

This annual PPB gain is deemed as arising on a chargeable event, called a ‘personal portfolio bond event’.