Insurers brace for potential surprises in UK’s Spring Budget

The insurance industry worries that further levies could be included in the UK government 2017 Spring Budget to be published on March 8.

“I think everyone is hoping that tomorrow’s budget will be a quiet one for insurers but the industry has learnt not to be complacent and will be braced for unwelcome surprises,” said Phil Smart, head of insurance and investment management at auditing firm KPMG UK.

“Over the last year, insurers have seen a host of new and unexpected costs as a result of policies such as upping the Insurance Premium Tax and drastically reducing the Ogden discount rate, resulting in higher compensation costs for insurers,” Smart noted.

The UK Government has startled the re/insurance industry by decreasing the personal injury (Ogden) rate by far more than had been expected, causing some companies to revise their profit results mid-reporting season.

The UK’s Lord Chancellor and Justice Secretary Elizabeth Truss surprised markets on February 27 by reducing the Ogden discount rate to -0.75 percent from 2.5 percent. The so-called Ogden tables are used to calculate compensation awards for serious personal injuries.

According to analysis by broker Willis Towers Watson the Ogden rate change will cost the insurance industry, in particular reinsurers, a material one-off reserve charge of approximately £5.8 billion.

The change in the Ogden rate has slashed £217.3 million off Direct Line’s 2016 pre-tax profit, which was reported at £353.0 million.

From June 2017 the Insurance Premium Tax will increase from 10 percent to 12 percent. This increase will mean the rate will have doubled from 6 percent to 12 percent in under two years. In the Autumn Statement 2016, the Chancellor hinted that the tax paid on insurance could increase, almost doubling again, British Insurance Brokers' Association (BIBA) said in a Feb. 28 statement.

BIBA has urged the government to freeze insurance premium tax following the discount rate change in a Feb. 28 statement.

Smart noted: “Brexit and wider geopolitical uncertainties pose challenges which the sector is working through: our clients tell us further levies would be particularly unhelpful from a competition, cost and compliance perspective. In a post-Brexit world the role insurance plays in infrastructure development and in providing protection for economic growth will be essential, there needs to be point at which the Government stops squeezing.”

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