Improving safety of younger drivers
Business case
Road Safety Foundation cost/benefit
analysis for the removal of Insurance
Premium Tax on telematics insurance
policies for under 25 year olds.
author I 16-10-2014
1
Annex 2:
Indicative estimation of costs and benefits from zero
Insurance Premium Tax (IPT) rate
All assumptions in this business case are based on reasonable working
estimates of the Road Safety Foundation following information received
from insurance industry sources.
2
Treasury Revenue Forgone
Assuming or taking:
•
Approximately 20m motor insurance policies in
the UK market.
•
Current volume of telematics policies: 300,000.
Of these, approximately 250,000 are under 25
year olds (20% of a total under-25s market of
1.25m).
Then:
•
In the first year, the gross cost of the tax incentive to
Treasury in lost IPT would be:
£1000
x
.06
x
325,000
=
•
There would be a natural market growth of
40,000 policies per annum.
•
The VAT exemption will encourage marketing
activity based on the tax relief and societal
approval, which will induce an additional annual
growth of 35,000 under-25 telematics policies
per annum.
•
An average telematics insurance premium of
£1,000.
•
IPT Rate at 6%.
average premium
IPT
current under 25s with telematics +anticipated growth
£19.5m
•
We would expect there to be 245,000 additional policies in
place induced by the tax relief and associated marketing
after the 7th year.
•
This lost IPT would rise to £46.5m in the 7th year with
775,000 under-25s policies in place (based on an annual
growth of 75k policies per annum over 7 years) which is
broadly two thirds of under-25s (62% penetration).
Expected total lost IPT over 7 years =
£231m
3
Reduction in road crashes & personal injuries
Assuming or taking:
•
Serious crash reduction of 30% for telematics
policy holders.
•
Under-25s account for 22% of 20,000 serious
crashes annually.
•
The policy induces and retains an additional
35,000 policy holders in year 1 and 245,000 in
total by year 7.
Then:
•
In the first year, we would expect a reduction of 37 serious
crashes:
20,000
x
.22
x
.3
x
•
35,000
/
1,250,000
=
37
Serious crashes annually
Under 25’s segment of serious crashes
Serious crash reduction for telematics policyholders
Additional annual growth
Total under 25s market
On the normal ratios*, this means a reduction of 2,590
personal injury crashes in year 7 and 25,900 damage
crashes.
* A working shorthand is that there are 10 times as many serious injuries as deaths; 10 times as many slight injuries as serious; and 10 times as many damage only crashes as slight injuries.
4
Cost savings
Assuming or taking:
•
£0.4 million as the average cost for a serious
crash causing death or serious injury (this
assumes that serious crashes involving young
people are no more expensive than the average
Then:
•
notwithstanding longer long term care costs)**;
and
•
It would be reasonable to expect that the economic cost
saved in year 1 would be:
37
Reduction of serious crashes
x
.4
Average cost for a serious crash
x
2
Total value of crashes taking into account killed,
serious injury, slight injury and damage crash
costs
All slight injury and damage crash costs equal
to serious crash costs.
=
•
£30m
In year 7 the economic cost saved is £207m.
Expected total cost saving: £829m
* *Source: DfT, 2014. Average value of prevention per reported casualty and per reported road accident: Great Britain, latest available year https://www.gov.uk/government/statistical-datasets/ras60-average-value-of-preventing-road-accidents
5
Net Present Value based on Treasury discount rate
of 3.5%
Present Value of
Benefits:
Present Value of
Costs:
Expected saving to
the Economy:
£699
million
£199
million
£500
million
Expected Benefit Cost Ratio:
Above 3
6
Summary of assumptions and expectations
Year
Total
policies
Lost IPT
(£m)
1
325,000
19.5
2
400,000
3
Policies
induced
Killed /
seriously
injured
saving
Economic
Cost
saved
(£m)
Present
Value
Cost
(£m)
35,000
37
30
19
29
24
70,000
74
59
22
55
475,000
28.5
105,000
111
89
26
80
4
550,000
33
140,000
148
118
29
103
5
625,000
37.5
175,000
185
148
32
125
6
700,000
42
210,000
222
178
34
144
7
775,000
46.5
245,000
259
207
37
163
829
199
699
TOTAL
231
Present
Value
Benefit
(£m)
Note: figures have been rounded.
7