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October 30, 2020updated 04 Nov 2020 10:04am

IPT removal or reduction for younger drivers using telematics would lead to decreased claim payout costs

By GlobalData Financial

Young and inexperienced drivers who pay more for their motor insurance premium on average are impacted the most by the insurance premium tax (IPT). There are calls for scrapping, or at least reducing, the IPT charge to younger drivers, on the contingency that they would also need to have a telematics black box to track driving behaviour as part of their motor insurance policy. Such a move would encourage younger drivers to get a telematics policy, which would decrease the cost of claim payouts in the longer term.

GlobalData’s 2019 UK Insurance Consumer Survey finds that 18–22-year-olds paid £872 on average for their motor insurance premiums, standing at more than double the £379 average for older age groups. The current 12% IPT rate affects those with higher premiums the most, as it is calculated based on the total car insurance premium costs. Therefore, younger drivers facing the most expensive premiums would have the greatest incentive to follow any legal regulation that could lead to a reduction in their current motor insurance premium.

In September 2020, Carrot Insurance began lobbying the UK government to reduce or remove the IPT for 17–22-year-olds who have a telematics policy in place. The proposition is now being backed by the British Insurance Brokers Association and the Association of British Insurers. The insurer believes that fiscal nudging will minimize the risk of this demographic being involved in a road traffic accident or collision. It also finds that among its customers, there was a 42% reduction in the number of accidents for customers with a telematics policy in place.

Driver licensing among young drivers has been declining since 2014. The decline is attributed to a greater number of younger people going to university and not needing a vehicle as a form of daily transportation. The cost of motor premiums also reached record-breaking levels in 2017, which has contributed to pricing out younger consumers from the motor insurance market. By reducing or removing the IPT under new propositions, younger drivers could be priced back into the market, driving an increase in gross written premiums.

Additionally, GlobalData’s 2020 UK Insurance Consumer Survey finds that only 18% of drivers aged 18–22 had a form of telematic tracking integrated in their motor insurance policy via a mobile app or black box installation. The proposed initiative could increase this proportion, making a significant impact on road driving behaviour among young people. Any resulting safer habits could be carried on as drivers get older.

The proposition to reduce, or remove altogether, the IPT for young drivers comes at an ideal time, as average claim costs continue to increase and, at present, claim prevention is the only viable option to decreasing the cost of claims paid out by motor insurers.

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