Protection gap
The economic backdrop and impact of inflation; global supply chain disruption due to international conflicts and adverse weather; as well as energy and labour costs, have contributed to an increase in the cost of insurance.
When costs increase, they disincentivise customers to take out the insurance they need and this doesn’t just expose them to greater risks, it also holds back our economy. This is what we call the protection gap, closing this gap should be a political and economic priority if we want to see growth and security in our economy.
With businesses and entrepreneurs unable to take risks or their businesses being exposed to sharp shocks our economy is less able to grow, innovate or weather storms.
There are of course many factors out of our hands but equally there are ways to reduce and or mitigate the rising costs we see.
Though businesses may believe that saving on insurance costs will benefit their business, finding at the point of claim that their loss will not be paid in full because they have undervalued their assets or not arranged sufficient cover would be catastrophic. We have seen the impacts of underinsurance first hand, and we are committed to working with BIBA to minimise this risk - to business customers and to the reputation of the insurance profession.
We see a growing protection gap in the commercial space. Polling we commissioned from Opinium shows 52% of small businesses and 49% of medium sized businesses have had to reduce their insurance coverage in the last 12 months. This means our national economy is less resilient to strains and shocks that may come.
Cost of motor insurance
There has been a great amount of public and political discourse around the cost of motor insurance which led Government to set up a Taskforce to understand and tackle the various contributing factors to the overall cost of it. BIBA is delighted to partner with Government, the regulators, industry and consumer groups as part of this project.
As well as supporting the Taskforce BIBA welcomes the Government’s plans for a road safety strategy. Tackling the costs that feed into car insurance premiums such as insurance fraud, theft, road safety, the cost of claims and individual risk factors such as age could result in meaningful interventions in this space.
One welcome decision has been the change in the Personal Injury Discount Rate for England, Wales, Northern Ireland and Scotland moving them from a negative to a positive position and aligning them at +0.5. We look forward to seeing how this impacts the cost of motor insurance.
Premium finance
There has also been a focus on premium finance arrangements and more importantly, how much these cost. Premium finance is a vital product which opens access to insurance for many who don’t necessarily have the funds to pay upfront for their annual insurance premiums and want to spread the cost. It’s paramount such products remain accessible and affordable.
We have worked extensively with our members over several years on how to articulate fair value in the costs of the products and services they provide. We are passionate about ensuring there is a healthy supply of premium finance which is why in 2024, we launched guidance for members to help them deliver fair value on premium finance, as well as the necessary disclosure surrounding this to ensure they can support its continued use.
IPT
We know Insurance Premium Tax (IPT) has a contributory effect to the cost of insurance and the decisions people and businesses make about the level of cover they can afford. The standard rate for IPT is 12% and the higher rate is 20%. While it was untouched in the 2024 Autumn Budget, research by WPI Economics in 2024 found 63% of households see IPT as a tax on working people. It’s also a tax on growth as 30% of businesses surveyed said an increase to IPT would decrease business investment. This research shows that not only would households and businesses cut insurance levels, but 40% of businesses state they would have to pass on increased costs to customers.