In Tuesday’s budget, the government announced that it will be increasing the lower rate of Insurance Premium Tax (IPT) from 5 to 6 per cent on 4 January 2011. The increase will apply to all new and renewing private medical insurance policies from this date.

Reaction within the industry has been fairly subdued. Concerns have been raised about increased premiums deterring clients from renewing their policies, but IPT was seen as a soft target before the budget and so the modest increase has come as something of a relief.

The problem with PMI is that the premiums usually increase sharply even if you haven’t made a claim. This is because medical inflation runs so high, and because we are a year older at each renewal and therefore represent more of a risk to the insurer. The increase in IPT, then, will compound the standard increase for age and medical inflation.

Annual increases on PMI policies very often cause a raised eyebrow. I’ve always made clear to my clients that their premiums will increase faster than general inflation and encouraged them to budget accordingly. If the client’s chosen level of cover is only just within their budget, I often suggest that we build in some overhead by opting for a lower level of cover.

Something else that I find myself doing with increasing regularity is outlining a downgrade path when a client first takes out a policy. This provides them with reassurance that they won’t have to give up their cover if the premiums become unaffordable. You can nearly always downgrade a PMI policy through an insurer’s range of plans without losing cover for your pre-existing conditions, but not vice versa.