Experts are bracing themselves for a "firesale" of protection products next year ahead of a rule change which could see premiums soar by 10%.
Some are predicting a 5-10% increase in the price of protection products in 2013 to cover the potential cost of an HMRC tax overhaul brought on by Solvency II.
The EU directive, effective from early 2013, will force changes to firms' capital requirements and HMRC will also have to alter the way it calculates its levies.
Currently, insurers with both protection and investment arms are only taxed after expenses, resulting in tax relief of 5-10%, according to consultant actuary at Grant Thornton, Nigel Cooke.
The I - E (investment - expenses) tax model allows these companies to offset costs associated with their protection business.
But in one alternative scenario proposed by HMRC, the I - E model is replaced by a tax on profits which removes this relief and effectively pushes up the cost of doing protection business.
Kevin Carr, CEO of the Protection Review, says: "If this happens we could see a firesale in 2011 as companies aggressively compete for new business before the changes come into effect.
"Beyond this in 2013, sales of new policies could fall significantly as many policies may not be able to save money by switching."
Cooke says protection has in the past been given an "easy ride".
"It features in the same tax bracket as savings, so companies face the same tax rules as a self-employed person, calculated after expenses."
Accountancy firm KPMG agrees the move away from the current model could lead to some companies shedding their protection arms post-2013.
"If Solvency II does result in higher capital costs, some institutions may even question the viability of the bancassurer model, and opt to divest their insurance operations," it says.
HMRC is currently consulting on the issue and is due to report back next month.
