On-demand insurance offers a wealth of benefits for consumers. Never has it been easier to purchase short term policies for everything from pay-per-use car insurance to home-share insurance that benefits renters.
Many agile InsurTech startups are using advanced data processing, Machine Learning, AI and automated technologies to generate flexible agreements in a matter of minutes. The industry is undeniably changing as a result.
While these low-cost, on-demand services are great for the consumer, they can be complicated for insurers to administer. Thousands of on-demand insurance policies could be taken out, adjusted and cancelled every day and all of these need processing, auditing and taxing like any other policy.
Except, whilst these policies are impressively on-demand, the insurance premium tax (IPT) on them is still required to be filed periodically, rather than in real-time. This creates a significant increase in the number of IPT filings, as well as a higher risk of compliance issues slipping through the cracks.
Specialist InsurTech companies often have an advantage in this situation as they’re building their order book from scratch, however in the case of larger, cross-border insurers that are suddenly catering to customer demand for these types of products, it’s more challenging to integrate everything with existing legacy systems and IPT remediation.
Below are two key elements of tax processing to bear in mind when offering on-demand cover.
Getting the tax point right
In order to efficiently process shorter term products, multiple policies are grouped together however tax processing varies from policy to policy. Some taxes are due early on inception, whereas others are due on maturity of the policy.
Filing systems must keep pace to avoid incorrect filing or missed payments. When taxes such as IPT are involved, calculating the correct amount per individual policy and understanding how to apply this to each policy is key – especially as filing these short-term policies is done in bulk.
Policy adjustments and cancellations
Freelance and gig insurance policies enable a ‘turn on and off’ flexible approach for those working in the gig economy, such as delivery drivers and contractors. This provides a low-cost alternative for both the hiring company and their employees. Freelancers are also taking advantage of on-demand professional indemnity, public liability and other business insurance.
This on/off model is slightly more complex to manage. It’s important insurers keep track of adjustments to avoid under or over declaring tax. Some insurers charge a monthly fee to help group these smaller cover periods, but if many of these policies were to have their tax over or under declared, there could be significant financial implications for the insurer.
The same applies to cancellations with these short term policies – if systems aren’t updated, insurers could over declare tax and therefore need to spend a significant amount of time and resource recovering taxes.
Calculation of tax for on-demand insurance
On-demand insurance has changed insurance for the better and made policies more accessible for those requiring short-term cover. It’s reinvigorated the insurance market in certain sectors and insurers should be taking advantage of the opportunity to introduce customers to these new offerings.
While this is a positive, it is important insurers understand and plan for the additional complexities that on-demand policies bring, namely for filing and processing IPT.
If the IPT administrative elements are in place, on-demand insurance has the potential to become a significant revenue stream for insurers.
Andrew Hocking, director of managed services for Europe at Sovos