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Taxes drain insurance premium pool

By Terry Dwyer - posted Saturday, 15 June 2002

It's said "everybody knows" that greedy people in wheelchairs, aided by greedy lawyers and stupid judges, are making insurance unaffordable. Politicians and insurance companies proclaim that insurance can be affordable, only if liability for wrongful acts is cut or abolished.

But will the summit on liability insurance ask if there are other greedy players?

As in the 19th century, the public increasingly defines insurance companies as companies which take your money against a rainy day, but who've gone out of business when you want to claim.


Having governments fix up insurance might seem like putting Count Dracula in charge of the blood bank. Government insurance taxes can suck out almost half the total premium. As well as state charges and stamp duties, GST of 10 per cent can be imposed on insurance payouts.

Insurance funds are further depleted by taxation of capital. Government-approved accounting standards allow payment of cash dividends to shareholders, out of unrealised gains. Government regulatory bodies have failed to protect policy-holders, yet they charge more than full cost recovery.

Insurance is taxed more heavily than gambling, an absurdity which should arouse some moral denunciation. The taxes being siphoned from the insurance premium pool far exceed claims under liability insurance.

Cumulative state and federal taxes on insurance have a massive impact on its viability. If the total percentage tax rate on insurance premiums is near 100 per cent, then to cover a net 10 per cent increase in the annual pool outflow, premiums must rise by almost 20 per cent. Unlike an income tax, there is no deduction for losses from turnover taxes (stamp duties, GST) so tax cascading has to occur. The GST forced many people to increase coverage, even though insurance should have been GST-exempt, as it is in Europe.

If you think of premiums as deposits and claims as withdrawals, the current insurance taxes are like losing up to 50 per cent of a bank deposit in tax. Only if governments wish to discourage self-provision and promote feckless reliance on handouts, would taxing insurance so heavily make any sense.

If taxes on insurance premiums were abolished (as financial institutions duties were when the GST came in), premiums would be much lower and there would be no premium crisis now. Or, a much more affordable adjustment in the current investment cycle. Senator Coonan, to her lonely credit, is one politician who has realized that insurance premiums would fall massively without taxes.


As for investment cycle downturns, the practice of shareholders and tax collectors treating nominal unrealised and realised capital gains as distributable and taxable income, virtually guarantees under-funding of future long-tail liabilities.

Insurers underwriting long-tail business tied to wages growth (e.g. liability for loss of future income or nursing care needs) need net investment income to keep pace with inflation. A virtually impossible task, if both the Tax Office and shareholders are draining nominal capital gains from the premium pool. The capital base needed to meet growing liabilities is depleted. The 19th century aversion to dissipating capital has real merit when providing against claims based on future earnings in an inflationary world.

Insurance premiums have also been pushed up by the demutualisation of insurers, such as the NRMA and AMP (assisted by governments through special legislation) and the sale of formerly competitive non-profit state government insurance offices. The demutualisation of the NRMA alone means some $139 million in dividends annually is no longer being ploughed back into the premium pool.

Tabloid hysteria and "shock jock" policy experts are useful diversions from penetrating questions. But if some judges have played Santa Claus, governments and insurance companies seem to have played the Sheriff of Nottingham.

Is it impolite to suggest that governments and shareholders pay back into the insurance premium pool something of the taxes, charges and dividends previously drawn from insurance businesses which we are now told will face insolvency at current premium levels - or at least keep their hands to themselves in future?

Adam Smith, the father of economics, in his 1759 work The Theory of Moral Sentiments recognised the law of negligent wrongs arose because uncompensated injury breeds vengeance and civil discord. One suspects he would have some shrewd Scots observations on the idea that liability insurance should mean no liability for injury and a free lunch for tax gatherers, insurance company executives and shareholders.

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This article was first published in The Australian Financial Review on May 29, 2002.

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About the Author

Terry Dwyer is a visting fellow at the Australian National University’s National Centre for Development Studies.

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