The perfect storm

After a long period of stable insurance costs, the perfect storm is brewing that is likely to see your insurance premiums increase significantly. There are two big changes afoot in the industry, both created by regulatory bodies, the impact of which will be felt this year.

What are the big changes in the industry?

Insurance Premium Tax (IPT) is a tax levied by the government on most general insurance premiums. IPT has recently risen to 12%, this is the third time in two years that we have seen the rate rise.

What does this mean for me?

With two rises in the last 12 months some policyholders will be seeing tax charged of 2.5% higher than their last renewal, depending on their renewal month. On a qualifying general insurance premium of £10,000 that could mean a rise in the total cost of £250 just on the tax alone.

The change to the Insurance Discount Rate is another important development. On 27 February 2017, the Lord Chancellor announced a cut in the discount rate, moving it from +2.5% to -0.75%. The discount rate is applied to lump-sum payments made by insurance companies to claimants following injuries sustained in motor accidents, accidents suffered at work or on another’s premises.

What does this mean?

The percentages concerned might sound like small numbers but when applied to large settlement figures will have a dramatic impact on the amounts that insurers will need to pay out. An example of this is a brain injury suffered due to falling from a height, this may have previously been settled at £5.3m but would now rise to £10.6m. *

How will this impact my premiums?

Whilst it is unclear exactly how much of an increase will be faced by the average customer, insurers will need to factor increased settlements into their premium calculations. It is estimated that the overall cost for the insurance industry across all current claims that are impacted is estimated to be £7bn. We are all working hard in the industry to manage the implementation of the changes and lessen the impact to our clients.

Is there anything else I should consider?

The increased settlements required in respect of liability claims may leave shortfalls for businesses that do not have sufficient levels of indemnity in place. Whilst the government sets the minimum levels of compulsory Employers Liability cover at £5 million, most insurers provide £10 million, no one will not step in to meet a shortfall should the limit be inadequate – the company concerned would be expected to fund the gap. Most small businesses would be unable to meet a demand for an additional £0.6 million in the case of the example above and might be forced out of business.

What should I do?

Despite the prospect of insurance costs rising, it is vital that to avoid the temptation to counteract this by reducing protection. We can help you to assess your current levels of insurance and your indemnity limits and to prepare for the changes ahead.

*Claims example provided by Zurich.