Who Bears the Cost of Insurance Taxes – the Insurer, or the Insured?

Christina Wilcox
October 13, 2020

In most cases, the primary responsibility of calculating, reporting and settling insurance premium tax (IPT) remains with the insurance company. But similar to VAT and other indirect taxes, although the insurer acts as the collector and administrator, the economic cost is ultimately borne by the policyholder as the purchaser of the insurance.

The cost can’t be passed to the policyholder in one of two ways: either directly, as an addition to the quoted premium (where the tax is then borne by insured), or indirectly, by including the tax costs into the total premium charged (often described as tax borne by the insurer).

Insured borne taxes

One characteristic of taxes borne by the insured party is that the tax must be shown on the premium invoice – or if exempt from tax due to perhaps the class of business, this should also be specifically noted. For example, in the Netherlands, IPT is due on the total amount of premium charged to the insured and it must be separately disclosed from the premium when billed to the policyholder.

In the UK, if the tax isn’t included on the invoice, the premium stated is deemed to include the relevant amount of IPT.

Insurer borne taxes

Insurer borne taxes tend to apply to a book of business or on aggregate amounts rather than on a per policy basis. For example, the Portuguese Insurance Supervisory Authority (Autoridade de Supervisão de Seguros e Fundos de Pensões) require a contribution of 0.242% of total premium income net of deductions and cancellations relating to the undertaking’s direct insurance contracts. As this relates to total premium rather than per policy at point of sale, it’s an insurer borne tax.

A good UK example is the London Fire Brigade Charge. This is calculated on the gross amounts insured by the insurer each year, at a rate of £35 per £1,000,000 sum insured. The charge is due on movable as well as fixed property, so it’s impractical to pass the charge on to all policyholders – effectively making this another example of a charge borne by the insurer.

Who pays?

In some jurisdictions, a difference between the two types is that for insured taxes, the insurer is only responsible for settling what they collected from the policyholder, whereas for insurer taxes the insurer must pay the full amount regardless of whether they collected it from the insured.

Co-insurance arrangements can further complicate matters. In most territories, each co-insurer is responsible for the declaration and payment of taxes relating to their share of the premium. However, in some cases it’s more practical for insurers to remit taxes to the lead insurer for single settlement. For example, in Cyprus stamp duty is €2 regardless of the premium value and it would be reasonable to pay this small amount to the tax authority in full.

It’s important insurers stay up to date with all relevant taxes and parafiscal charges that apply to the coverage offered. This will not only help in complying with tax authority obligations but will ensure they’re not left with an unexpected bill.

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Christina Wilcox

Christina is a Manager in the Compliance Services team, responsible for delivery of indirect tax compliance services for a portfolio of global insurers. She is a part qualified chartered accountant with over seven years of experience in dealing with European insurance premium tax. Christina previously worked in software development at Ordnance Survey and pensions administration at Skandia.
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