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Premium tax in U.K. set to rise

Industry concerned about higher costs


Raising the tax on insurance premiums paid in the United Kingdom could result in rate increases by insurers and coverage reductions by buyers.

But at least one source said some insurers may absorb the added cost to keep the business in the U.K.

The U.K. insurance premium tax will increase to 9.5% from the current 6% for coverage bought on or after Nov. 1.

U.K. Chancellor of the Exchequer George Osborne had announced the tax increase in July as part of his summer budget.

At the same time, Mr. Osborne also said the nation's corporate tax rate would be cut to 18% from the current 20%, effective by 2020, in a move aimed at keeping the United Kingdom competitive.

The British Insurance Brokers Association said it hopes the government will reverse the premium tax increase.

“We are extremely disappointed in this rise in insurance tax (that) will mean insurance will become more expensive for the public,” BIBA CEO Steve White said in a statement.

Though the insurer pays the tax to the government, it will show up as higher premiums for the property/casualty buyer.

“It is very disappointing to see a more than 50% tax increase being imposed,” said Huw Evans, director general of the London-based Association of British Insurers.

At the same time, Mr. Evans said reducing the corporate tax rate will help keep the U.K. competitive and “enhance London's position as insurance capital of the world.”

The corporate tax rate tops 30% in some other E.U. Member states and 40% in the United States.

Airmic Ltd., the London-based U.K. risk management association, said it fears that insurance buyers — many of whom are under pressure to cut costs — would simply purchase less coverage.

“While this wasn't totally unexpected given an upward trend in similar taxes globally, we are disappointed by the magnitude of the rise — an increase of over 50%,” Julia Graham, Airmic's technical director, said in a statement.

“The timing is particularly difficult given that many companies will have already set their budgets for the next renewal season,” she added.

Taxes in Europe are all over the board, varying by country and class of business.

The U.K. premium tax hike will raise an additional £1.75 billion ($2.71 billion) per year on top of the current £3 billion ($4.65 billion) raised, said Adrian Smith, global head of insurance premium tax at consultant KMPG L.L.P. in London.

“However, the increase in IPT might result in general insurance policyholders having insufficient cover as they seek to balance an increase in price with maintaining the cover they require,” he said. Any rate hike also might prompt some buyers to seek coverage outside of the United Kingdom.

Ben Flockton, insurance tax partner at PricewaterhouseCoopers L.L.P. in London, said insurers also may be concerned that the move signals an intention to ultimately align the insurance premium tax rate with U.K.'s 20% value-added tax rate, which he said “we have already seen in other E.U. member states.”

Some insurers may seek to reduce costs rather than raise rates, said David Coupe, a partner at London-based law firm EC3/Legal L.L.P.

“With the soft market and low rates seeming to be a permanent feature, it is a brave insurer that risks losing business by increasing premiums,” he said. “It seems more likely that the already squeezed insurers, brokers and underwriters are more likely to grin and bear the increased costs themselves.”

The higher premium tax comes at a time when the insurance market is facing stricter solvency requirements and increased regulation, Mr. Coupe said.

“As a result, it has the potential to lead to cost cutting,” he said. “Many (insurers) could look to exit to avoid this consequence, with more distressed sales occurring.”