After a difficult few years for the private medical insurance market, news that insurance premium tax is going up is the last thing it needed. Sam Barrett reports on how the sector plans to respond
The health insurance market was dealt a significant blow this summer, with the Chancellor using his first budget to announce a hike in insurance premium tax (IPT). The rise, which takes the rate from 6% to 9.5% from 1st November 2015, could make medical insurance and cash plans less attractive to some customers and is likely to drive considerable change in the market.
Although IPT was seen as something of a soft target for the cash-strapped Chancellor, the scale of the increase took many by surprise.
“We understand the pressures on the Chancellor to increase public revenues and control costs but a 58% increase in IPT is both unrealistic and unacceptable,” says Stuart Scullion, commercial director at Punter Southall Health & Protection and chairman of the Association of Medical Insurers and Intermediaries. “An increase from 6% to 7% would have been understandable and much more acceptable.”
But faced with a big hole in the finances, the Chancellor had little alternative, pointing to European rates of IPT to justify the move. These are significantly higher than in the UK, for example, in Germany the rate is 19%; in the Netherlands 21% ; and in France the rate varies according to the line of business but is 18% for motor.
However, while the increase in the UK’s IPT rate brings us closer to the rates charged on the other side of the channel, Matthew Judge, director at Jelf Group, believes the government’s broad brush approach is inappropriate.
“The rate of IPT is higher in mainland Europe but many countries including Germany and the Netherlands have exemptions for healthcare products,” Judge says. “It seems very unfair that at a time when the government is trying to encourage employers to take a more proactive approach to managing employee health they whack up the tax on products such as medical insurance and cash plans.”
Certainly increasing the cost of medical insurance does appear to run counter to the government’s position on managing sickness absence in the workplace. This saw it introduce the Fit for Work Service at the beginning of the year, which will be rolled out to employers this autumn, alongside a tax exemption for expenditure on interventions that help employees return to work. This is available on expenditure of up to £500 per employee per tax year.
The other irony is that by making medical insurance and cash plans less attractive, it could drive up demand for the NHS – the very service the IPT increase was designed to help fund.
“The government should be encouraging subscribers to medical insurance as a means of relieving some of the current pressures being felt within the NHS,” adds Scullion. “Tax relief on premiums for the over 60s or retired people would have been a better way to stimulate demand and help the NHS.”
Adding to the dismay is the fact that there’s little clarity coming from the insurance industry around how the increase will be applied.
“We’re getting mixed messages from insurers about how they intend to apply the IPT increase,” says Judge. “Some appear to be happy to absorb it themselves; others are stating it will apply on any premium paid from 1st November; and there are even some who don’t appear to know what they plan to do. We’ve had several insurers asking us if they can see their competitors’ statements on IPT.”
The response from a handful of insurers highlights the differences in their approaches. For example, Bupa has written to its intermediary clients informing them that premiums it receives on or after 1st November will attract the new rate and that it will not be possible to avoid the increase by pre-paying for new contracts that start on or after this date.
AXA PPP healthcare is taking a similar position, although it provides more detail around how it will treat anyone who joins an existing SME scheme from 1st November. Where this is the case, IPT will be payable at 9.5%.
At the other end of the spectrum, cash plan provider Health Shield has announced that it will be absorbing the increase across its range of cash plans. This applies to all policies, both individual and corporate, that renew after 1st November, with members benefitting until the end of 2016.
Scullion is also dismayed by the confusion in the insurer camp.
“You would expect there to be a consistency in the approach by insurers but this doesn’t appear to be the case,” he adds.
Impact on the market
While consistency may be lacking, everyone is in agreement about how the IPT rise will affect subscriber numbers.
“The increase doesn’t make health insurance any more attractive,” says Elliott Hurst, director, health consulting at AXA PPP healthcare. “As well as the additional IPT, where an employer provides cover for its workforce, there will be further tax on the additional IPT in the shape of benefit in kind taxation.”
This will see employers paying a further 13.8% in national insurance on the uplift in premium.
Employees will also see their P11d costs increase. Employers usually use a gross rate to calculate benefit in kind liability so this will increase to reflect the additional IPT.
“It could push some employees, especially the healthier ones who don’t claim, to get rid of their medical insurance altogether,” says Judge. “This will put further pressure on the NHS.”
In addition, although policyholders and employers will feel the pinch of the tax rise, the higher premiums won’t bring a windfall to advisers in the shape of higher commission payments. Commission is calculated on the net premium so, while an adviser may find themselves carrying out more work for the insured to mitigate the IPT rise, they won’t actually see their remuneration increase.
And more work is definitely on the horizon. Hurst says that the scale of the increase will mean more large corporates will shift to healthcare trusts.
“Large employers currently on insured schemes should review or revisit the option to go for a healthcare trust,” Hurst says. “As a trust doesn’t attract IPT, they will be more compelling once the rate increases.”
Although numbers vary from provider to provider, trusts can be set up for groups of at least 100 employees. And, although there are set up costs associated with a trust, employers can also take advantage of the lower cost versions that use an insurer’s master trust.
These master trust arrangements give the same cover flexibility and tax-saving benefits without the costs and associated governance required when an employer runs its own trust. However, the downside is that they do tie the employer to the insurer offering the master trust.
Another option that may become more popular is the corporate deductible product launched by WPA back in 2010.
“Our corporate deductible is a halfway house between a fully insured scheme and a healthcare trust,” says Rachel Riley, managing director at WPA Protocol. “It has no set up costs and is easy to unravel if the employer doesn’t want it anymore but they still benefit from the IPT savings.”
The numbers can also be smaller. While Riley recommends a group has at least 1,000 employees to take advantage of a trust, 500 is generally sufficient for its corporate deductible.
She also expects to see more companies coming into the market. Although Aviva has dipped its toe into this space, she believes the IPT rise will be the catalyst for others to explore this area.
Without the scale for a trust, SMEs and individuals, as well as corporates who want to remain insured, will need to look for other options to mitigate the effect of the IPT increase.
Excesses could help some customers save themselves from a chunky price rise according to Scullion.
“A £100 excess would typically reduce premiums by between 8% and 10% depending on the insurer,” he explains.
Another option is to adjust the payment frequency. Rather than paying monthly, by paying annually, especially if the renewal date is prior to November, it could enable a policyholder to take advantage of the lower IPT rate. In addition there are savings of between 4% and 5% to be had by switching to a one off payment.
Some schemes may also look to introduce caps on benefits or underwriting for new members to help stem increases. And many expect new options to come onto the market.”
It could be the opportunity for some really clever innovation in the market, adds Riley.
“We may see new products and more flexibility in schemes to allow employees to be real healthcare consumers.”
The only way is up
But while the market may still be reeling from the shock increase in IPT, with the Chancellor pointing out how low the UK’s rate will still be in comparison to mainland Europe, further increases could certainly be in the pipeline.
Mitigating these increases through product innovation may be one way to maintain health insurance’s appeal and customer base. However, the industry could also look to Europe for its next move – underlining the importance of a tax exemption for health insurance schemes.