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Tax fears for protection premiums

Protection premiums could rise by up to 10 per cent if HM Revenue &Customs takes protection out of the basic life insurance tax regime, according to Grant Thornton.

At the Protection Review conference in London last week, Grant Thornton senior actuarial consultant Nigel Cooke predicted the tax implications of such a move, which HMRC has been consulting on, would mean that insurers would be forced to raise their premiums.

Cooke said: “If HMRC quite logically decides that pure protection should not be within the basic life insurance tax regime, it probably means that for a large number of insurance writers those premiums will rise by 5 to 10 per cent, before anybody adds insurance premium tax to that.”

“The Government would be making it more difficult and unattractive for people to protect themselves, which I do not think is what they want.”

Le Beau Visage managing director Peter Le Beau says: “There is a concern about such a change to the tax regime. It is another unintended consequence that is coming out of left field that will worsen opportunities to sell protection.”

Association of British Insurers assistant director of health and protection Nick Kirwan says: “If you strip out the benefits of the tax regime, then I would agree it is likely to lead to prices increasing. Prices are set by the most competitive price in the market.”

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. I think this reform is essential if the protection industry is to thrive. It will create a level playing field amongst providers as an increasing number of providers don’t get the tax subsidy (because it relies on endowment and with-profits bond sales).But also the change will encourage new entrants as they don’t get the tax subsidy and don’t like the idea of entering a market where they can’t compete on a level playing field. In the longer term the improved competition will do what it always does and bring in innovation, customer focus, drive down price, improve products and services. It will accelerate the departure of those providers who don’t have cost efficient processes and are relying on the tax subsidy to help them compete.

    So we will get an industry with new entrants and innovation.

    Also, IP pricing is unaffected as no insurer gets a tax subsidy on IP. So if CI prices increase a little, it might even have the unintended consequence of more IP sales.

    Who could possibly object ? Of course there will be scaremongering by those insurers who currently rely on the unfair advantage to compete, and of course tell us they object to this change because their premiums will increase and the poor customer will suffer. But the reality is it could be their profits that suffer as they find they can’t increase their premiums as other providers will then take their business (remember not all providers get the subsidy so won’t be increasing their prices).

    A similar reform was introduced in Ireland in 2000, and some insurers decided to absorb the increase. And of course prices have been falling ever since. If you think the UK protection market is competitive, take a look at Ireland where price matching guarantees and premium discounts ( but with commission still based on the undiscounted premium) are common.

    In the UK term assurance is cheap as chips and prices have been falling and continue to fall, and is there any evidence that falling prices is driving up demand? So even if the cheapest prices do rise a little in the short term surely this is a price worth paying for the longer term prize of a thriving industry ?

  2. Can I be clear that I fully agree with Insurance Boy that a level playing field is a critical component in bringing in new players and facilitating innovation.

    However, my concern is that the current regulatory changes are occurring in silos, each for good reason, each with due consideration in order to meet regulatory objectives albeit often set by Government or the EC. If we can get this debate out into the open there may be a chance to set industry objectives that meet the best interests of wider society.

    Hence instead of thinking in terms of removing tax benefits from one critical area of protection insurance in order to get to the level playing field, rather we should be looking at a new playing field that gives some benefit to the IP world too. The long term benefits to our society if our population were better protected would far outweigh the relatively small tax take involved, financially as well as morally.

    Add to this the widening gap in conduct of business rules between ICOB & COB, potentially to be widened by RDR, plus the potential capital pressures for specialist insurers within Solvency II and we are walking into a minefield of unintentional consequences. With a new government in place there is a chance to step back and mould a framework that motivates a competitive and innovate customer facing industry, for protection and savings.

    The tax review is one part of this, but it is an integral part. We should not miss this opportunity to get the landscape right.

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