Abi Director general Mary Francis has told Chancellor Gordon Brown that further increases in insurance premium tax (IPT) will disrupt the state of the insurance market.

In a pre-budget letter sent to The Treasury last month, Francis said that IPT discouraged poorer people from taking out insurance.

Arguing the case against insurance premium tax, which the industry brands as a tax on financial prudence, Francis says damage has already been caused in cases where IPT rates of 17.5% were applied.

A submission document says that insured warranties are the obvious example where "retailers have in many cases replaced insured products with non-insured alternatives".

"It is common for these alternatives to insurance to be presented in such a way that only the most diligent buyer will appreciate that they are being sold a non-insurance product which will in most cases offer less protection."

Francis argues that retailer-operated warranties work on a cashflow basis where income received is used to service claims while there is no third party regulation of uninsured warranties.

Around 85,000 consumers were left with uninsured warranties which could not be honoured when television retailer Colourvision and computer retailer Escon failed in 1996.

"Over the period 1992-95, 1,470 vehicle and petrol retailers and 130 motor vehicle wholesalers went out of business. In contrast, over the same period no extended warranty insurer failed. If one had, individual policyholders would have recovered 90% of any loss under the Policyholders Protection Act."

The ABI is worried that higher IPT would force other business sectors – especially concerning the provision of private healthcare – to organise risk on a non-insurance basis.

Francis also said that increasing IPT would undermine efforts to get more people insured. "Higher IPT can only make insurance even less affordable to the poor, who are those most in need of insurance protection."

Meanwhile, the ABI has given its blessing to a new organisation, The National Campaign against Insurance Premium Tax, based in Knaresborough, Yorkshire.