Insurers fuming at IPT hike is a futile exercise

I used to work in the tobacco industry. Yes, it was a long time ago, when you could watch Hamlet ads on the telly, and try and work out what the latest poster for Silk Cut was trying to tell us. Every year, the tobacco industry put a great deal of effort into its Budget Submission, to persuade the Chancellor that increasing tax on cigarettes was not only highly regressive, but widening the tobacco tax differential between the UK and its European partners would lead to an increase in cross-border smuggling and reduce Exchequer revenues commensurately.

Nevertheless, every year the tax on cigarettes went up – it was just a question of how much. For all our sophisticated modelling and lobbying, smoking was a cash cow for the Government, and what’s more, the tax was easy to collect. We tobacco barons moaned about the tax increase, the amount and volume of moaning exactly correlated with the size of the annual tax hike.

So the insurance industry’s complaints following the Chancellor’s decision to increase IPT from 6.5% to 9% have a strong whiff of déjà vu for this grizzled lobbyist. We were told that increasing the basic rate of IPT from 6% to 9.5% will add over £12 to the average buildings and contents policy and over £13 to the average annual motor insurance bill. Others flagged a concern about the tax hike being part of a gradual move towards aligning the IPT rate with the VAT rate, something we have already seen in other EU member states.

Deloitte said it could cost the average two-car household £37 annually. It is expected to generate over £1.5bn extra IPT a year for the Exchequer.

The negative reaction of various insurer CEOs comes as no surprise, but in truth, they should have been expecting it. During the 215 General Election campaign, the Prime Minister committed to holding off on income, VAT and NI tax increases during this Parliament, but that needed to square with the Chancellor’s desire to bring down the deficit. So the Treasury would be looking for other revenue-raising opportunities, and IPT was an obvious target.

Not only is it simple to collect (aka tobacco taxes), but the standard rate has not risen significantly since it was first introduced in 1996. Neither is the industry able to call on much public support. Levels of public trust in insurers remain at historic lows.

In the last Parliament, the Prime Minister called in a number of insurer CEOs to Downing Street and between them agreed a series of measures to reduce the cost of motor insurance. Reforms to personal injury claims soon followed, and a number of other Government-backed initiatives (fraud, Medco) are in the offing too. The slack created by Government intervention – lower premiums – could be re-balanced by an increase in IPT. A quid pro quo, if you like.

Yes, we know that motor competition is intense, and insurers are struggling more than ever to make money from their motor books, but I don’t think that will worry Mr Osborne too much. Unlike smoking, motor insurance is compulsory, so there is a guaranteed market for insurers, with, of course 400,000 new entrants each year in the form of young drivers.

Like pensions reform, the IPT genie is now out of the bottle, and the industry should prepare for a gradual increase in IPT to meet the current VAT rate. Once the Government began to reduce the level of pension tax relief, and the size of the lifetime allowance, it couldn’t stop. The pensions industry has lobbied hard to explain the long term damage that’s likely to be caused by short term tax raising policy, but it has fallen on deaf ears.

So it is with IPT. Instead insurers should be thinking about how they can offer new products that reflect these changing times. For all the talk of a technology revolution in motor (telematics, self-driving cars and so on) most of us drivers are still offered 12 month annually renewable motor cover – a product that has not changed for decades.

Nick Corrie, chief executive of telematics technology company Trakglobal (a Certus client), had it right when he said at a recent Government roundtable on IPT and the implications for young drivers: “While the industry will continue to make the point the IPT increase is unfair on young drivers, in the meantime the market should look to see if it can solve the problem itself. The smart thing is to try to solve the problem ourselves through ingenuity. Commercially, we're able to offer much cheaper policies for young drivers than we could a few years ago and still remain profitable.” Corrie’s call for ingenuity applies to all drivers, not just youngsters.

The State likes smokers because they pay for their habit twice over: taxes on tobacco, and dying younger, so costing the State less. Smokers do their bit. The UK has been living beyond its means for decades, and if we want our schools, hospitals and pensions, they need to be paid for. The insurance industry, whether it likes it or not, will have to do its bit too.