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 costs are a significant expense. 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
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
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.
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 affects insurance premiums, as it is insurance actuaries (employed
by the insurance companies) who set the premiums for the insurers.
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 in the premium costs. Besides bundling policies, you
can also choose a more favourable payment plan.
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
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
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.
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