In 1994, Insurance Premium Tax (IPT) was introduced to raise revenue from the insurance sector, which was viewed as being under-taxed. It has been generating a hefty income for the government ever since, 6bn of tax revenue in 2018-19 and c 60bn since its’ inception. In recent years, the tax has risen steeply, pushing insurance premiums up as well.
For any business, insurance from providers like one sure insurance are a necessary expense in order to protect the business from financial losses. Though the effects of IPT’s have set many on the hunt for ways to reduce their premiums and manage their insurance costs. Below is an outline of the finer points of IPT and some ways to mitigate its effects.
The Basics of IPT
As the name implies, the IPT is a tax levied on the insurance premiums paid by policyholders. It taxes most insurance risks with a few notable exceptions. These include commercial aircraft, commercial ships, export finance, and commercial goods in international transit, to name but a few.
It has been described as a “stealth tax” because it’s levied from insurers but leads to increases in premiums, almost 50% of the population are unaware of it and it is levied on purchases which more than 50% of the population say are “essential”. This causes an exceedingly odd situation when public bodies, funded by the central government, purchase insurance. The IPT effectively gets paid back to the central government from the public body that it funds.
The tax is charged at two rates: 12% is the standard rate for most types of insurance, whilst 20% applies to travel insurance, some vehicle insurance, and mechanical or electrical appliances insurances. It’s similar to VAT, in that it’s calculated as a percentage of the total cost of a premium.
The Rise of IPT
The IPT was set at 2.4% in 1994. Over the years it’s grown to the 12% standard rate set in 2017. The increases responded to many factors, one being VAT avoidance by some businesses. Inflation is another contributing factor, as rising insurance costs translate to more cash raised by the IPT.
Insurance companies could mitigate the increases in IPT by absorbing some of the costs through premium reductions. But that’s a short-term strategy and the costs are eventually passed on to buyers. This creates a situation in which responsible businesses that try to have comprehensive coverage are effectively punished for being insured.
The straightforward solution to reducing the effects of IPT on your expenses is to work on reducing your premiums. However, there are a few other strategies as well.
Minimise Risks
The simplest solution to the problem of IPT and rising premiums is to manage risks better. Better risk management results in lower premiums by reducing the occurrence of claims. There are any number of ways to reduce risks. Therefore, every organisation will need to evaluate potential areas of improvement on a case-by-case basis. Collaborating with an insurance actuary can help a great deal in identifying where risk can be reduced in ways that meaningfully affect insurance premiums, as it is insurance actuaries (employed by the insurance companies) who set the premiums for the insurers. By investing in proactive risk management, businesses can secure more favorable Business Quotes while bolstering their financial stability.
Package Insurance and Pay in Advance
Most large insurers have policies that cover a broad range of business liabilities. If several liabilities are insured with the same provider, it often carries discounts on the premium costs. Besides bundling policies, you can also choose a more favourable payment plan for your specific business needs. So, if you’re contemplating something niche such as shooting range insurance cost or liability coverage for a sports arena, then you should consider bundled options that cater to those specific industries in order to save money and avoid unnecessary coverage.
Furthermore, paying insurance costs in full rather than on a payment plan usually results in lower premiums as well. Some insurers automatically put buyers on a plan that’s not optimal, so it’s important to inquire about better ways to pay off the premium. It is well known by insurers that monthly payers have more frequent claims (possibly due to being reminded about the policy every month via their monthly payment)
Don’t Pay for Coverage You Don’t Need
As helpful as it can be to bundle coverage to reduce premiums, it can be just as detrimental to buy coverage that your organisation doesn’t need. Finding the right fit is a matter of examining insurance products carefully. A broker or an insurance actuary can help you decide on coverage that’s sufficient but not excessive. Therefore, finding someone you can trust is crucial to the process.
It’s not uncommon for an organisation to focus on reducing the cost to the point of ignoring the potential removal of an unnecessary policy altogether.
Alternatives to Traditional Insurance
Another option is to self-insure all or part of the liabilities of an organisation. Self-insurance doesn’t get very much attention on the individual level but organisations of a certain size might find that it’s a great way to reduce their IPT (effectively eliminating it). Self-insurance doesn’t have to replace traditional insurance altogether. An organisation might choose to self-insure some liabilities that makes sense from a standpoint of premium reduction, while keeping the rest insured through third-parties.
Managing Premiums to Reduce IPT
Insurance premium tax is placing an increased burden on insurance buyers, but it doesn’t have to be catastrophic. By approaching your organisation’s insurance wisely, you can reduce premiums and the impact of IPT.
Reducing risk is a simple method of reducing premiums, as is bundling insurance for better pricing. Ultimately, if a business can afford it, it may even be a smart alternative to self-insure some or all of its liabilities.
Author’s Bio:
John is an actuary and owner and Director of HJC Actuarial, which he founded in 2003 and which has advised over 100 clients since its’ inception. He has worked in the insurance industry for 30 years, qualifying as an actuary in 1995 and becoming a Partner in a major global consulting firm in 2000. Since 2003 he has provided independent advice to his clients on optimal insurance program design, presentation of risks, premium negotiation with insurers, insurer solvency assessments, policy wordings, insurer selection, and insurance broker selection.
