The industry breathed a metaphorical sigh of relief when the Chancellor Philip Hammond announced no planned rise in Insurance Premium Tax (IPT) in last November’s Budget. Whether this came in response to the industry venting its frustrations last year is unclear, but what is certain is that a future rise cannot be ruled out. The industry hasn’t laid down arms just yet.
As part of an ongoing campaign to exempt health cash plan providers from IPT, the Association of Financial Mutuals (AFM) is heading to Westminster this month to hold a briefing session with the All-Party Parliamentary Group for Mutuals.
With a goal of helping build a consensus in Parliament for AFM’s position, members will highlight the impact IPT has had on health cash plan providers.
AFM chief executive Martin Shaw says that not-for-profit providers cannot absorb the costs of IPT without reducing benefits or lessening their investment in community projects.
“The government raises around £30m from IPT on health cash plans,” says Shaw. “But our analysis shows that if IPT were abolished, it would increase demand for policies, which in turn would increase the benefits due to society of around £60m.
“At present, firms are having to reduce costs to help ensure a stable claims ratio. This squeezes profitability and that has a knock- on effect on availability of profits to be invested back into the business and into the local community.”
Shaw highlighted the fact that health cash plan providers contribute substantial sums to local community and public sector projects.
Some types of insurance are already exempt from IPT, namely life, income protection and critical illness. And, according to various industry experts, there are strong arguments for private medical insurance (PMI) and health cash plans to be treated similarly to these. Why? Because evidence shows that the rises in tax are going to add even more pressure onto an already over- stretched NHS.
The findings of a study by the Centre for Economics and Business Research (CEBR), commissioned by Bupa and published just head of last November’s Budget, found that almost 200,000 individual health insurance customers have dropped their policies to depend solely on the NHS in the past three years, largely because PMI is simply too expensive.
The CEBR used data gathered from 2003 to 2017. It estimated that every 1 per cent increase in IPT has led to around 31,000 people moving from private to NHS-funded care.
Individual vs group
Whilst the individual market is shrinking, the group market has all but flatlined. LaingBuisson’s most recent Health Cover market report, published in October 2017, revealed a barely noticeable 0.6 per cent growth in corporate PMI policies in 2016, which reached 3.09m employees, and covered 5.42m lives – 8.3 per cent of the population. Meanwhile, there was a 2.2 per cent contraction in individual PMI policies to 928,000, a similar fall to that reported in the previous three years, meaning the individual market now covers 1.47m people, representing 2.2 per cent of the population.
SMEs bring it on
It will be interesting to see how the 2017 statistics for group stack up because, according to commentators, small to medium sized enterprises don’t seem put off by the cost of healthcare. On the contrary, no doubt driven by employee demand and the need to remain competitive, the SME market seems positively robust.
“I’m not sure the SME market has adapted that much to the rise in IPT, but if it increases more we could reach a tipping point,” says Stackhouse Poland managing director, health & protection Marcia Reid.
“The increase in IPT is part of a bigger piece around the increase in healthcare premiums in general. This is driven by various factors – medical inflation, age bandings, etcetera. IPT represents just one aspect.”
The main impact is on individuals in terms of the effect on P11d, according to Reid. “People are much more aware of their rising P11d rate these days. That said, in our experience they still want to retain healthcare cover.
“It’s a brave employer that will take PMI away from staff. It’s more valued now than ever, considering the pressures on the NHS. We’re
placing more and more virgin schemes with start-ups and small companies, in addition to those that didn’t have a good benefit structure before.
“The IPT structure doesn’t seem to matter as they want the healthcare regardless.”
Association of Medical Insurers & Intermediaries (AMII) chairman Stuart Scullion concurs. He says that advisers are explaining to clients the make up of premium increases in more detail, outlining the additional impact of IPT and how it is out of the control of insurers. “Most clients are just living with the increase,” he adds.
Large corporates play safe
But while healthcare costs might not be adversely impacting the SME sector just yet, costs are often the main – or at least initial – driver of client discussions with consultants in the large corporate sector.
Healthcare trusts represent one way to help mitigate rising PMI costs, but a bigger picture view is required.
Aon Employee Benefits principal Rachel Western anticipates that trust discussions will increasingly be placed on clients’ agendas as costs continue to rise. And while master trusts are often adopted for these reasons, a full healthcare trust is adopted for more strategic reasons, with the IPT savings representing a beneficial by-product.
Western says that healthcare trusts allow for more ownership and flexibility. Therefore, they can prove particularly useful when tailoring a benefits offering to a client’s specific needs, health risks and strategic objectives.
Costs, on the other hand, may be managed via different routes. “Typically, many clients still focus on provider claims management as the key route to managing PMI costs, settling on benefit reductions when costs do end up spiraling,” adds Western.
Over the last year, the market has reported some hesitancy by clients towards get involved in trusts. This uncertainty was driven by the Finance Act (2017), which raised a question mark over whether a healthcare trust becomes a ‘notifiable arrangement’ for tax advantage reasons, where the IPT saving represents the main reason to enter into a trust.
Recent clarifications, however, state that a ‘notifiable arrangement’ exists if there is a ‘promoter’ involved. A promoter is described as a firm responsible for the design of the trust arrangement that is made available to others in the course of relevant business. This definition applies to firms providing services relating to tax, banking or securities. Employee benefit consultants seem to fall out of its remit.
Following this clarification, Aon reports that more clients are showing interest in trusts again.
“We have seen a small increase in healthcare trusts, particularly master trusts, as these create options for a wider base of smaller clients to consider trust options,” adds Western.
Talking to ourselves?
There is, on the issue of IPT at least, an overwhelming – albeit perhaps unsurprising – consensus of opinion that enough is enough. Whilst the group market may be faring slightly better than the individual market at the moment, there’s no denying that the contributory cost hike of IPT isn’t helping growth and retention in the slightest.
In addition to the AFM’s campaign to get an IPT exemption for health cash plans, other industry bodies are also playing their part for members, including the Association of British Insurers (ABI), the British Insurers’ Brokers Association (BIBA) and AMII.
The question is: is anyone in government circles really listening? “My greater concern would be the threat of a Labour government, who have already stated as part of their last manifesto, their intention to increase IPT to 20 per cent on private healthcare spend in order to fund NHS car park costs,” comments Scullion. “No one seems to understand the contribution the private health market contributes to the UK economy and how it supports an over-stretched NHS.”