Posted on Aug 25, 2011 by Sergio Ulloa
A new tax report released this week from the Association of British Insurers (ABI) and PricewaterhouseCoopers demonstrates the important role that the domestic insurance industry continues to play in driving the United Kingdom's economy forward.
The ABI asked 28 of its members to participate in the 2011 study and to provide data on their tax payments for their accounting year ended to 31 March 2011. The 28 members taking part in the study represent roughly 80 percent of all premiums written by the entire ABI membership for the year. The UK trade body asserts that these results can then be held representative for the sector as a whole. The ABI have conducted similar studies in 2007 and 2009 to see how insurance companies have reacted to a difficult period for the UK economy and to provide evidence that contributes to public policy debate.
According to the August 22nd filing, the British insurance sector has now paid a total of £10.4 billion (US$17.21 billion) in tax to the UK Treasury over the past year. The total tax contribution for the industry equates to £4.6 billion (US$7.6 billion) in taxes borne and £5.8 billion (US$9.6 billion) worth of taxes collected on behalf of government, this is inclusive of Insurance Premium Taxes. This overall tax contribution is larger than the entire £10.2 billion (US$16.9 billion) Home Office budget, with over £200 million (US$330 million) to spare.
The ABI noted that insurers who provided data for both the 2009 and 2011 studies had seen their Total Tax Contribution rise by an average of 19 percent. This has been expected because the low corporate profits and transaction activity experienced in the immediate aftermath of the financial crisis and recession necessitated reduced corporate tax and stamp duty levels in 2009. What perhaps wasn't expected would be that tax contributions from insurers are now exceeding pre-recession era amounts.
Insurance companies are distributing more of their revenue to the government than towards their shareholders, staff or lenders. The ABI survey data showed that 50.9 percent of members' expenditure went to the UK government (through taxes borne and collected) compared to just 26.2 percent spent on employee wages and salaries, 19.6 percent released in dividends to shareholders, and 3.3 percent in interest payments to financiers. Corporation tax was the largest tax type borne, accounting for 59.6 percent of total taxes borne, followed by VAT.
The UK insurance sector has traditionally been a large corporation tax payer. PricewaterhouseCoopers was able to determine that corporation tax paid by insurance companies totaled £2.7 billion (US$4.46 billion), equal to 6.4 percent of total government corporation tax receipts in 2010. This represented a 50 percent jump paid out by members of the Association of British Insurers since 2009. Insurers in the Hundred Group, a compendium of the UK's largest companies, contributed the third highest corporation tax of any sector. ABI noted that the insurance sector's corporation tax contribution was now returning to near the level it was at before the financial crisis.
ABI Director General Otto Thoresen commented in a press briefing that said these figures demonstrated the important contribution insurers were making to the UK tax revenues and the economy at large. "The tax paid by the UK insurance industry could pay for the whole of the Home Office budget, or fund the budgets of the Departments for Transport, Communities and the Foreign Office put together. Insurers are crucial to the economy. Our total tax contribution is now higher than it was before the recession showing the important role the insurance industry is playing in the recovery and how resilient the industry is during tough times," he said.
The insurance industry has remained one of the biggest private employers in the UK, with over 275,000 people working in the sector. ABI member companies account for 152,000 of these employees and had employment taxes borne and collected worth £2.64 billion (US$4.3 billion). Despite the recession, employment rates have not notably dipped in this sector. The insurance companies surveyed as part of ABI's 2011 study paid an average of £21,793 (US$35,984) into the UK public finances per employee in employment taxes alone, 15.3 percent higher than previous studies. The median salary for an insurance worker in the UK is £42,100 (US$69,515) and compares favorably to the £25,900 (US$42,765) national median wage.
Thoresen concluded the report, saying that further revisions and improvements towards the tax code would improve the business environment in the country and ultimately generate greater returns for the Exchequer. "These figures highlight the importance of consistent, competitive tax rules which could help the industry to grow further so that it can continue to make an important contribution to the UK coffers. We are talking to the government about how to make the UK tax system an asset for the UK when it comes to retaining and attracting insurers to the UK. It is important we encourage our good, successful UK businesses to expand and grow rather than having rules which make the UK a less attractive place to base a business."
Thoresen's concerns about the viability of the UK insurance market might be well founded. According to the latest ICAEW/Grant Thornton UK Business Confidence Monitor (BCM), confidence in the country's banking, finance and insurance companies have all slipped in the past three months to the end of June.
The BCM fell by two-thirds in the last quarter and is now at its lowest level since the middle of 2009, when the UK was still in a recession. For the insurance industry in particular, this downgrade has been largely due to a year of unprecedented catastrophe losses
and the continued inability of the pricing market to adjust and harden to enable insurers to recoup expenses. Peter Allen, the head of financial services at Grant Thornton, summarized the index's findings: "For the insurance industry, 2011 so far has been characterized by a series of expensive catastrophes which have hit profitability - but not sufficiently to create a turn in the pricing cycle."
The continued uncertainty over the start date and stipulations for Solvency II's euro-wide capital requirements and other regulatory issues has also hit industry confidence hard. "Solvency II has required a significant investment of both time and money by re/insurers, as they put in place the wide ranging changes to capital and reporting requirements," said Allen, adding, "The fact that there is still debate as to whether the implementation date will be January 2013, or the start of 2014, is not helping the industry to feel that it can prepare with confidence."
Confidence in insurance companies may be tested but their services are more greatly required in the UK today than perhaps ever before. In the aftermath of one of the country's worst riots in decades
, insurers are working hard to settle numerous complex claims that will help rebuild battered communities around England. In addition to their work and contribution to the home economy, the UK insurance industry is also one of the country's main exports, with around a fifth of its net premium income being generated by overseas business. Closing the trillion dollar gap in coverage between the Western and Eastern hemispheres could eventually yield significant dividends for the UK treasury as well.
Association of British Insurers
The ABI (Association of British Insurers) represents the collective interests of the UK's insurance industry. The Association speaks out on issues of common interest; helps to inform and participate in debates on public policy issues; and also acts as an advocate for high standards of customer service in the insurance industry. Every day, ABI members pay out an estimated £155 million in benefits to pensioners and around £58 million in general insurance claims.