If you’re an independent retailer, it’s likely you’ve been hit by rising insurance costs. At a time when retailers’ finances are already stretched to the limit, many will be feeling the pinch once again following the rise in premiums from the new rate of Insurance Premium Tax (IPT), which came in on June 1.
It is estimated that the increase will affect some 50 million policies a year, with small business owners shouldering a big slice of the burden. Coupled with the change in the Ogden discount rate – the rate used to calculate the amount paid to claimants in the event of an accident – which came into effect on 20 March this year, this is likely to spell misery for many as insurers hike up their premiums to cover their escalating costs.
IPT has doubled in 18 months, rising from 6% in 2015 to a new high of 12% now. The tax is applied to most insurance policies with the exception of life insurance, permanent health insurance and travel insurance, which has its own rate of 20%. According to the government, this latest hike is destined to fund a series of infrastructure projects. No other tax has risen by so much in the same time span.
And what of the Ogden Discount? Most shop owners will have a combination of Public, Product and Employer’s liability cover to protect themselves, the public and their employees in the event of an accident. In the case of a life-changing injury, the court will make an award to compensate the victim for future care and loss of earnings. The victim may accept an upfront lump sum, which is adjusted according to what interest they can expect to earn by investing it. The rate of adjustment is known as the Ogden Discount, and had been fixed at 2.5% since 2001. Following a review by the Lord Chancellor this was reduced to an unprecedented -0.75% in March of this year.
As an illustration of just what this means in practice, a 25-year-old suffering a brain injury as the result of a fall may be awarded £100,000 a year for life to cover the costs of their care and the loss of future earnings. Under the new multiplier the amount the insurer is required to pay out as an upfront sum will rise from £3.1 million to a staggering £8 million. While not all cases may be this extreme, many payments will be increasing by more than 100%. It is inevitable that insurers will be forced to pass these increases onto their customers in the form of heftier premiums.
So what can retailers to do minimise the impact of these changes? Initial hikes in liability premiums may not be avoidable, but following best practice to reduce the chance of accidents occurring will help them to avoid further rises as the result of claims against their policy.
To avoid the inevitable cycle of heavy discounts and price loading, one option for retailers is to choose an alternative to traditional insurance providers. Mutuals are one option, as they are exempt from IPT.