Coping with insurance premium tax increases

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Coping with insurance premium tax increases

Growing waiting lists, and rationing of care within the NHS, suggest that taking out private medical insurance is a sensible option. But with a series of increases to insurance premium tax (IPT) pushing up the cost of cover, there is a risk that more and more people will find it unaffordable. 

IPT has seen three increases in the last 19 months, taking it from just six per cent in 2015 to 9.5 per cent in November 2015, 10 per cent in October 2016 and, most recently, 12 per cent in June.

While the tax applies to a range of general insurance products, including home, car and pet insurance, the size of medical insurance premiums means policyholders will feel a doubling of the rate particularly keenly.

According to figures from the Association of British Insurers, the government takes £231 in IPT on the average annual premium of just more than £2,000. This is £39 more in IPT than before the latest rate rise, and £115 more than a policyholder would have paid in 2015.

 

Cost pressures

What makes matters worse is that this increase comes on top of the premium inflation that medical insurance customers already experience. 

Carol Porter, head of commercial at The Health Insurance Group, explains: “Premiums increase by around 10 per cent every year as a result of age increases and medical inflation. Given that many people who have cover are retirees on fixed incomes, they will struggle with the additional IPT increases.”

 

Reducing premiums

Although it can mean compromising cover, there are a number of ways in which policyholders can reduce their premiums. Adding an excess, where they agree to pay the first chunk of their annual claims, can shave a few percentage points off the cost. For example, a £200 excess can give savings of up to 10 per cent, while at £1,000, the savings could be as much as 30 per cent.

Another variation on this is co-insurance, where the policyholder pays a proportion of the claim, typically capped at a set amount each year. The main exponent of this is WPA, which offers its Shared Responsibility concept on many of its plans.

With this the policyholder agrees to pay 25 per cent of their claims up to a maximum of between £250 and £3,000 a year. The higher the annual limit, the greater the savings, with someone opting for £3,000 potentially enjoying a premium reduction of up to 50 per cent.

Policyholders can also take advantage of no claims discounts. These reward those who do not make claims every year, but with the discounts meagre it will usually only serve to stabilise premiums at renewal. 

 

Excess cover

Taking out a separate policy to insure the excess on a medical insurance policy is also possible. 

Gemma Harris, operations director at Chase Templeton, uses Medex Protect individual medical excess insurance to spread the risk across two policies. 

Ms Harris explains: “A client could reduce their medical insurance premium by taking out a higher excess, with the medical excess policy taking care of the excess payment. This approach can be more cost effective.” 

As an example, a 45-year-old in Birmingham would typically pay £607.08 a year for a policy from Aviva offering full inpatient and day care treatment and no outpatient cover. Add in a £200 excess and the annual premium drops to £546.36, saving £60.72. Alongside this, they could take out a Medex plan covering them for the £200 excess. This costs £52, saving them £8.72 overall.

Savings increase with higher excesses, so, for instance, a £500 excess would reduce the Aviva premium to £455.40 a year, while the Medex premium would increase to £104. This gives an overall saving of £47.68 a year.

Six-week plans are another option. These pick up the cost of treatment, providing that the NHS waiting list in the area is longer than six weeks. Although they used to give a relatively chunky discount of between 20 per cent and 25 per cent, the saving has reduced. 

“More conditions have NHS waiting times of more than six weeks now, so the discount has fallen back to around 15 per cent,” says Paul Moulton, intermediary distribution director at Axa PPP healthcare, who adds that it may make sense for these plans to move out to a 12-week waiting time.

 

Benefit restrictions

Removing benefits can also suit a policyholder’s requirements, with most insurers making their plans modular to facilitate this. As well as removing cover for items such as psychiatric and cancer treatment, policyholders could take a more radical approach and strip their plan back to inpatient cover only.

This ensures that any major treatment is taken care of, but leaves them having to pick up the cost of consultations and diagnostic tests themselves. These items are lower cost, with a consultation costing around £200, for example.

Ms Porter adds: “They could consider taking out a health cash plan alongside this stripped back cover. These can cover consultations and some will also pick up any excess.”

As well as chopping benefits, it can also be worth being more selective about where treatment takes place. Many insurers offer hospital lists that restrict where policyholders can go and some, such as Axa PPP healthcare and April UK, have plans linked to specific hospital chains. This can take anything from 10 per cent to 20 per cent off the cost of cover and can work well where the policyholder can easily access the selected facilities.

 

Future rates

While restructuring cover, or adding cost control mechanisms can help to keep premiums sustainable, it is also sensible to consider where IPT rates are likely to go in the future. 

Stuart Scullion, executive chair of the Association of Medical Insurers and Intermediaries (AMII), believes this is not the last rise. “IPT is seen as a low-hanging fruit by the politicians, who point to higher rates in the EU as a justification for the increases,” Mr Scullion explains. 

“There is little resistance to the increases, and I fear they could look to equalise IPT with VAT at 20 per cent. Price is the main reason policies are cancelled: the increases in IPT could be the final straw.”

Ironically, cancelled policies could actually end up costing the government a lot more than the revenue generated by IPT on medical insurance. Without cover, these individuals would have to fall back on to the NHS for treatment at a cost to the government.

AMII is currently working with its insurer members to determine the financial implications of this additional cost burden on the NHS. In addition, it has launched a parliamentary petition to make healthcare insurance exempt from IPT. This was set to run for six months until October, but was closed when parliament was dissolved in May. Although it had gained more than 1,000 signatures, AMII will need to start the petition again when the service reopens.

EU comparison

This is frustrating, but even without figures on the savings medical insurance brings to the NHS, the campaign has some good ammunition. Although the government points to higher rates of IPT in the EU as an excuse to increase rates in the UK, health insurance products are actually exempt from the tax in many countries.

Of the 28 EU countries, only 14 charge IPT on medical insurance, with only five imposing a rate above nine per cent. These are Belgium (9.25 per cent), France (9 per cent), Greece (10 per cent), Slovakia (9.5 per cent) and, with the highest rate of all, the UK (12 per cent).

Whether or not AMII is successful in arguing for an IPT exemption on health insurances, the increases in this tax mean policyholders face significant price rises. Using the variety of cost control mechanisms can help to make premiums more sustainable, but it may require creativity on benefit design to keep cover affordable.