Home and motor insurance policies are set to become more expensive after a tax on premiums was hiked for the second time in less than a year.
Private medical and pet insurance products are also affected by the latest rise in the standard rate of insurance premium tax (IPT), which took effect yesterday and which insurers have dubbed “a raid on the responsible”.
The tax has now edged up 0.5 per cent to 10 per cent, having already jumped from 6 per cent to 9.5 per cent last November. The measure affects policies including car insurance, home insurance (buildings and contents), breakdown cover, health insurance and pet insurance. The tax also applies to the administration charges levied on policies, which means customers could even pay more for things such as address changes.
Travel insurance isn’t affected, as it’s already charged IPT at the higher rate of 20 per cent, while life and mortgage insurance policies are exempt.
The move was announced in the Budget in March, when the government said the £700 million it expected to raise from it would fund spending on flood defences. The British Insurance Brokers’ Association said at the time that it was “astonished” by the increase, while the Association of British Insurers (ABI) warned that it would result in more people being unable to afford motor insurance and potentially taking the risk of driving without it.
The tax affects more than 50 million insurance policies, according to the ABI. It said the combined increases mean the average comprehensive motor insurance policy is more than £16 higher than a year ago, while the average home insurance contract is at least £12.50 more expensive.
Pet insurance policies and private medical insurance policies are £12 and £52.50 higher as a result of the double tax hike.
Huw Evans, director general of the ABI, said: “These two IPT increases are a raid on the responsible, taking advantage of those who already do the most to avoid becoming a burden on the state. The government should be in no doubt that such steep increases in insurance premium tax may eat into the finances of both households and businesses.”
Motor insurance premiums have already begun to rise over the past year, bringing the end to a sustained spell of price cuts. The most recent AA figures showed that prices went up by 2.3 per cent in the three months to the end of June, while the ABI said the average comprehensive motor insurance premium in that quarter was up 10 per cent on the same period a year earlier.
Matt Oliver, car insurance spokesperson at Gocompare.com, said: “The car insurance market is incredibly competitive, which generally helps to keep prices down, but there are genuine inflationary forces present at the moment, including the cost of personal injury claims.”
Some people will see their home insurance policies go up by 10 per cent or more, said Mark Richards, private clients director at Bruce Stevenson Insurance Brokers in Edinburgh. He pointed out that the tax rise has coincided with a further increase in premiums paid to insurers in the Flood Re programme (the government and insurance industry deal aimed at keeping premiums affordable for flood risk properties).
“When these are added to the fact that the sums insured in household policies can be index-linked with inflation to help avoid under-insurance, some claims-free home insurance policy premiums are increasing by 10 per cent or more at renewal even without the insurer increasing their rates,” Richards explained. “Some insurers are absorbing the cost of Flood Re themselves, but they have to pass on the cost of the tax increase.”
Claims that insurers are using the IPT hike as an excuse to push insurance premiums up are wide of the mark, said Richards.
“If anything it makes it more difficult for insurers to increase their premiums further. Some of the insurers we work with are actually reducing the part of the premium they retain to make the overall increase more palatable.”