The cost of insurance is more than the costs of paying claims and expenses
The government announced an increase in Insurance Premium Tax (IPT) in its budget statement earlier this year. The amount has gone up from 5% to 6% and is applicable from January 2011. The tax on travel policies will go up from 17.5% to 20%. These increases are unavoidable and, unlike VAT, cannot be reclaimed. All accounting transactions from January will include the new figures.
The VAT increase will hit the insurance industry as well. Insurers are in the exempt category and have to pay VAT and cannot offset it against purchases. This impacts on their costs and also the cost of many claims as repair bills and professionals fees are subject to VAT. We do not know yet whether this will be absorbed or passed on in higher insurance premiums.
Insurers also have to include in their premiums a number of other charges which have increased rapidly in recent years. One of the largest are payments to the Financial Services Compensation Scheme. This fund provides compensation to customers when a financial services company or an insurer goes bust. Under current rules, insurers have to pick up a substantial amount of the bailout costs of Icelandic banks and Bradford and Bingley etc; these costs have to be funded out of insurance premiums paid by customers.
If an insurer ceases to trade, the Scheme pays for the vast amount of outstanding claims for personal clients and businesses under £2m turnover. It also covers all third party motor claims and claims from employees for all businesses. This scheme applies to UK insurers and most overseas companies operating in the UK. The costs of this can be substantial.
Motor insurers also have to pay out to any person who has a claim against a motorist who was uninsured or did not have valid insurance at the time of an accident. They can recover these costs from the offending motorist but this is often impossible. This is a substantial part of all motor premiums.
The recession has increased the percentage of uninsured motorists and the number of financial service companies going out of business. Once again this puts pressure on insurance premiums.
