Against the backdrop of the drastic changes in insurance premium tax, brokers play a vital role in advising consumers
Insurance is a basic financial safety net for millions of people but, with the latest rise in insurance premium tax and the FCA’s renewal transparency rules recently coming into effect, the affordability and quality of cover is under scrutiny.
In 2015, then-chancellor George Osborne announced that IPT would increase from 6 per cent to 9.5 per cent. Today, following the third increase in less than two years, the tax stands at 12 per cent.
Taken together, the Association of British Insurers estimates the three increases will raise more than £13bn for the Government over five years.
But while it is not a direct tax on consumers, there is no doubt providers will pass the cost on. So the price of home insurance products will rise once more.
The danger is that, if IPT continues to increase, this could affect the perceived value of the protection versus the cost among consumers.
It is not in anyone’s interest to make insurance unaffordable but, with speculation that IPT could rise to a staggering 20 per cent, this is exactly what could happen. The important cover consumers need will be pushed further out of reach due to price, and some will consider not protecting themselves at all.
Adding to this are the FCA’s new transparency rules, which have increased pressure on insurance providers to give customers more information about the annual rise in premiums before they are automatically renewed.
While these rules will stop providers enticing new customers with teaser rates before increasing premiums at the renewal stage, it will likely mean an increase in initial premiums.
After all, if providers are going to be required to disclose the difference in cost each year, it makes sense for them to increase the initial costs and scrap any introductory offers. So the stage has been set for insurance premiums to rise dramatically.
Alternatively, insurers may look to reduce the levels of cover they offer or even what is included within their policies to remain competitive. This will undoubtedly affect the quality of product provided to customers.
For example, an insurer may remove the very important trace-and-access cover to ensure the price is still attractive. However, in the event of a leak without trace-and-access cover, any damage done to the home in locating the leak (removing a wall, ceiling or floorboards, breaking through a concrete floor to access plumbing or a gas pipe, and so on) is not covered.
Customers could see a cheaper product and, without the advice of a broker, could purchase the policy without realising what they are signing up to.
Currently, two-thirds of insurance policies are bought through an intermediary, so brokers play a valuable role in advising consumers about what is right for them against the backdrop of these drastic changes.
Benefits of policies that include full and comprehensive cover (such as trace and access) should be discussed clearly with clients.
At the same time, brokers need to acknowledge that premiums may go up given the legislative changes.
Although the UK’s IPT is still relatively low compared to that of other EU countries, the fact so many people remain under-insured means intermediaries need to ensure customers are aware of the changes and are offered safe but cost-effective cover.
Hannah Tasker is general insurance manager at First Complete and Pink