Under the Bonnet of Motor Insurance

Elliot Shulver
July 3, 2019

When it comes to motor insurance, everything is high; high tax rates, high volumes of tax administration and high levels of complexity.  A thorough understanding and the implications of each is key to tax compliance.

High rates

Motor insurance claims the title of the highest premium tax rate in Europe. The Danish tax on motor third party liability insurance comes in at a substantial 42.9% of premium. If this were not enough, an insurer may have to “top up” their tax payment to the minimum contribution of 47.2% of the value of their claims if this is higher than the tax already paid. The overall rate applied on French motor third party liability insurance is also high at 35%, although it is divided into three distinct taxes. The only premium tax on non-life insurance for Swedes is on motor third-party liability insurance and is currently 32%.

The tax rate on motor premiums is almost always greater and never lower when compared to the taxes due on general liability premiums across the EU. In fact, the average premium tax rate for general liability insurance is just under 8%, but the average rate for third-party motor liability is nearly double this at 14%.

High compliance

The premium tax requirements on motor insurance are extremely onerous, as are the regulatory conditions imposed on this highly controlled industry. Motor insurance incurs more premium taxes and parafiscal fees than any other business line. For instance, Belgium’s general liability premiums are subject to one premium tax with 12 tax returns being due throughout the year. However, a Belgian motor risk insurer will have to file 48 distinct tax returns covering 4 distinct taxes in the same period. In Portugal, where the numbers are 14 vs. 30 this tale is repeated.

High complexity

Because of the number of taxes applicable, calculating taxes on motor insurance business is more complex than for many other business lines. While general liability programs across Europe will be subject to approximately 25 separate taxes, the corresponding motor figure is double this at 50, all with distinct rates, regulations and deadlines, and all with the potential for change. Calculating the tax accurately may depend more than any other line of business on high-quality policy data.

In some cases, the location where the vehicle is registered in the country is required. In Italy, each of the 110 Italian provinces has the power to set their own insurance premium tax rate on third-party motor liability premiums written in relation to vehicles registered there. When the car is stored in the inner London Boroughs, motor-own damage policies in the UK can incur an extra tax. And, details of the type of car to be covered are needed in some regions. Belgian tax rates may differ if the car is used for business or private use and the car is within certain weight limits. In Austria, the calculation of the vehicle insurance tax requires information on the power of the vehicle’s engine in kilowatts.

Each of these “highs” illustrate the need for accuracy and when combined, the potential risks for insurers are compounded. The high rates imply that a mistake can be expensive impacting profit margins; the high complexity means that a mistake is far more likely to occur; and the likelihood of errors rises due to the increased number of taxes. However, it is possible to reduce and manage the risks with thorough product evaluation and coding and the administration can be simplified with a considered and coherent approach.

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Elliot Shulver

Elliot Shulver is a client manager for indirect tax at Sovos. He joined the company in April 2014, having spent the previous two and a half years living and working in Australia and New Zealand. He is responsible for Gambling Duties, as well as researching and managing consultancy projects and technical knowledge for IPT.
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