Motor and home cover could soar after Osborne hikes insurance tax to 9.5%, warns industry

Tax hike represents rise of almost 60 per cent on previous 6% level
Motorists and home owners will be hit hard, says industry
Fresh crackdown on claims management firms is on the way

By Tanya Jefferies for Thisismoney.co.uk

Published: 11:02 EST, 8 July 2015 | Updated: 11:28 EST, 8 July 2015

191

View
comments

Buying motor, home and other insurance cover is set to become pricier from November after Chancellor George Osborne announced a tax hike from 6 per cent to 9.5 per cent.

The news sparked an instant industry backlash, with warnings it would hit motorists and home owners hard and could put off some people from getting insurance..

The Government also announced a fresh crackdown on claims management companies - including a proposed cap on their charges and increased regulation - amid accusations that their business of encouraging claims adds unnecessary costs to insurance premiums.

Price blow: Buying motor insurance is set to become pricier after a tax hike from November

In its official Budget statement, the Government said it remained committed to ensuring customers can buy insurance at a fair price.

But it pointed out the cost of home contents cover had fallen 8 per cent since last year, and the cost of comprehensive motor insurance by 10 per cent over three years, and that insurance premium tax would remain lower than in many other EU states - including Germany which levies it at a 19 per cent rate.

On the claims management industry, the Government said it wanted to build on the success of previous measures such as action to address fraudulent whiplash claims.

AA Insurance issued an angry response to news of the insurance premium tax hike to 9.5 per cent, saying: 'The contention that falling premiums somehow justifies the tax increase is outrageous.'

Managing director Janet Connor said: 'It means an additional £17.50 on top of the average quoted Shoparound premium, according to the AA’s benchmark British Insurance Premium Index, and it comes precisely at a time when premiums are beginning to rise once again.

'The average Shoparound premium at the end of the first quarter of 2015 was £530, having fallen from a peak of £742 at the end of 2011, following a significant increase in the number whiplash injury claims and ‘cash for crash’ fraud. They have not yet fallen back to the £493 which was a typical premium at the beginning of 2010.'

Ms Connor said the tax increase hadn't been thought through and would have unintended consequences, including greater upward pressure on premiums as a whole and people being tempted to attempt to drive without insurance cover.

Kevin Pratt, insurance expert at MoneySupermarket.com, said: 'For drivers and households across the country, it is important to note that the taxation you pay on home and car insurance premiums will rocket by almost 60 per cent from November, adding £35 to insurance bills for the average two car family.

Home cover: Government pointed out the cost of contents insurance had fallen 8 per cent since last year

'While we have all been benefitting from declining costs for car and home insurance premiums over the last few years, this tax increase may now sadly negate those benefits.'

Simon McCulloch, director of comparethemarket.com, said the major worry was that the insurance premium tax increase to 9.5 per cent would simply be passed on to consumers through higher premiums.

'There is a risk that through increasing insurance premiums, it may in fact discourage people from taking out insurance, or being underinsured.

'The regulators must safeguard against this happening, otherwise these policies, however well intentioned, will simply hit people's pockets to the detriment of all.'

Amanda Blanc, boss of AXA’s UK Commercial Business, said: 'The cap on charges from claims management companies is a very welcome development in today’s Budget.

'A clampdown was necessary to address a growing compensation culture epidemic. We recently found that more than a quarter of people have received a nuisance communication from a claims management company in the last 24 hours and this bombardment can often lead not only to the annoyance but also the anxiety of victims – not to mention higher premiums for everyone.

'More work needs to be done to address the societal issue of claims farming – and, for instance, we would support a ban on automated voicemail calls – but hopefully today’s cap will reduce the volume of unsolicited messages.'

Deals Of The Week