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Insurers Avoid 25% Vat Cover Drop-Off

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s decision to ‘exempt’ property and casualty insurance from Value-Added Tax (VAT) has prevented an estimated 25 per cent fall-off in coverage, which would have been “catastrophic for the Bahamian public”.

Anton Saunders, RoyalStar Assurance’s managing director, told Tribune Business that being VAT ‘exempt’ was “the lesser of two evils”, but a status that the industry would readily accept.

While acknowledging that the sector would still “get hit” through having to pay VAT on its claims costs, Mr Saunders said cost increases here were preferable to imposing a 15 per cent increase on consumers’ gross written premiums.

If the Government had remained committed to the latter option, the RoyalStar chief said it would likely have made home and auto insurance unaffordable for many Bahamians, resulting in a 25 per cent reduction in coverage levels.

“The committee that we had did a good job of advising the Government that the consequences of not being exempt would be catastrophic for the Bahamian public, in terms of affordability and coverage,” Mr Saunders told Tribune Business.

“We are still going to get hit on the claims side because of the services, but we can live with it as a trade off against what the Bahamian public would have been faced with. It’s the lesser of two evils, and we’ll accept the second of them.”

He added that if VAT had been levied on consumers’ gross written premiums (GWP), “the consequences would be great, if not catastrophic, in the Bahamas and for people not insured.

“The committee estimated that with a 15 per cent gross written premium increase from VAT, you’re probably talking about a 25 per cent fall-off in insurance coverage,” Mr Saunders added.

“First, some people would not pay it, and second, people would reduce their value” of property/autos to be insured.

Many homeowners and vehicle owners, unable to afford VAT-inflated insurance premiums, would likely underinsure, reduce coverage to third party levels or possibly not insure at all.

This would potentially expose them to great loss and damage, were a catastrophic event to occur, and lead to wider negative social and economic consequences.

Mr Saunders told Tribune Business that the impact from VAT being levied on property and casualty insurance premiums “would flow right through the economy.

“Banks would have been impacted, as [borrower] clients could not afford insurance, so the economy would be hit severely from an insurance standpoint.

“Everyone understands the importance of having affordable insurance,” Mr Saunders added. “Our premiums are high because of the catastrophe element, and to add another cost to it would be very detrimental to the public and insurance industry.”

After stating that the Bahamian property and casualty industry would be VAT ‘exempt’ in its initial White Paper on Tax Reform, the Government then abruptly changed course, and decided to place the proposed 15 per cent levy on the industry.

This sparked outrage, and consternation, in the sector, which argued that it had been treated as ‘exempt’ in almost every other country that had imposed VAT.

The industry also argued that a 15 per cent increase to existing premium prices would likely make insurance affordable for a significant percentage of Bahamian society, exposing those persons to catastrophic losses.

The insurance industry’s consultation efforts with the Government appear to have been successful, given that the VAT Bill, regulations and accompanying Ministry of Finance notes show it has been returned to its original status of VAT ‘exempt’.

While this means consumers will not be burdened by 15 per cent VAT on their home/auto insurance premiums, they may have to bear some price increases - albeit much smaller - due to the higher cost burden underwriters will incur.

As they are VAT ‘exempt’, property and casualty insurers, and their agents/brokers, will be unable to reclaim the tax paid on their inputs by ‘netting off’ this sum against what they collect from their clients.

As a result, the Bahamian insurance sector will still see its costs - especially its claims costs - increase post-July 1, 2014, when VAT is introduced. Some of these increased costs will likely be passed on to consumers.

Still, Mr Saunders expressed optimism that cost increases on the claims side could be mitigated by the reduction in Customs tariffs that will happen simultaneously with VAT’s introduction.

If this occurred, he added it was only the services side, such as labour costs for auto repairs, that would be hit hard by VAT.

“On the whole, it’s the best outcome for the insurance industry,” Mr Saunders told Tribune Business. “We know the challenges facing the country, and the Government needs money to operate.”

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