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Vat 'Uncertainty' May Halt Insurer Savings Pass-On

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Uncertainties related to Value-Added Tax (VAT) may prevent Bahamian insurers from passing reinsurance savings on to consumers via reduced property and casualty insurance premiums.

While underwriters said it was “unlikely” that reinsurance costs would increase for 2014, with an inactive hurricane season offsetting May’s flooding claims, VAT’s inflationary impacts on their administrative and claims costs, plus the wider economy, required “caution” in premium pricing.

Tom Duff, general manager of Insurance Company of the Bahamas (ICB), the underwriter through which BISX-listed J. S. Johnson places much of its business, said: “I think it’s fair to say the industry is expecting some relief in terms of a reduction in [reinsurance] catastrophe prices.

“Just what the catastrophe price reduction will relate to, in terms of a percentage reduction, we’ll have to see.... It’s at an early stage, but we as an industry would expect some kind of reduction given that we had a storm-free season.”

The relatively small size of the Bahamian property and casualty market, with annual gross written premiums at $350-$400 million, means that local underwriters - which have relatively thin capital bases themselves - have to buy huge amounts of reinsurance coverage.

This means that Bahamian property and casualty prices are largely governed by reinsurance treaty costs.

But, despite the anticipated good news from the reinsurance market, Mr Duff warned Bahamian consumers that any reduction might not be reflected in the premiums they pay.

“If you’re a consumer, the industry has to be fairly tentative on that one, if only because of the uncertainty on VAT and what it means to companies’ balance sheets,” the ICB general manager told Tribune Business.

“On that basis, we may have to be cautious in reductions in insurance rates regardless of what we get from reinsurers, because of that uncertainty.

“I think we’ll be very careful, because we know 2014 going into 2015, there is going to be a squeeze on all businesses and their bottom line because of VAT.”

Suggesting that “clarity” over the Government’s VAT plans may be some months away, Mr Duff said most people knew they had to help redress the fiscal imbalances, and “just want equity, fairness”.

All insurance will be treated as VAT ‘exempt’, meaning Bahamian consumers will not have to pay the 15 per cent levy on their premiums.

Yet, on the downside, this means insurance companies will be unable to recover VAT they themselves pay on their inputs, increasing claims and administrative costs.

It is likely this increased cost base will have to be passed on to consumers via some premium rises, although probably less than 15 per cent, thus negating any reinsurance cut.

Patrick Ward, Bahamas First’s president and chief executive, agreed that industry claims and administrative costs would be impacted if VAT was implemented on July 1, 2014.

“There’s no question that if VAT is implemented in July, there will be a build up of impact on administrative costs and claims costs,” he told Tribune Business.

“The extent of that is not fully known. One of the things being monitored very closely is the extent of the inflationary impact, so we can make any adjustments required to product pricing.”

Mr Ward said much would rely on insurers configuring their computer systems to capture VAT data, and “ensure we are actually incorporating those changes into the product line-up that will reflect the most accurate pricing”.

Acknowledging that the industry’s VAT ‘exempt’ status was “a relief from the policyholder perspective in terms of upfront costs”, Mr Ward warned: “The impact of VAT on the economy is likely to be broad-based for most people. There are lots of other factors that could come into play.”

The Bahamas First chief said reinsurance pricing for 2014 was still unknown, but the Bahamian property and casualty market would have access to the necessary capacity.

“It’s highly unlikely there will be any increase despite the fact we had significant flooding in New Providence in May 2013,” Mr Ward said of Bahamian consumer prices.

Tim Ingraham, president of Summit Insurance Company, through which Insurance Management places much of its general business, said that while it was “too early to tell”, many reinsurers had indicated they did not want to lower their rates for 2014.

Contrasting with Messrs Duff and Ingraham slightly, Mr Ingraham emphasised he did not want to see any reinsurance rate increases, adding: “There are a number of things in play, be it VAT or something like that.

“If you are paying attorneys’ fees, paying bodily injury claims where the cost of living is factored in, if you’re paying the labour cost of auto repairs and that attracts VAT with it, then you’re claims costs will probably increase.

“But again, there still seems to be a long way to go on that before we know what we’re faced with.... We do not want costs to go up. Insurance is a significant spend for everyone. We want to contain the cost as much as possible.”

Anton Saunders, RoyalStar Assurance’s managing director, echoed Messrs Duff and Ward, telling Tribune Business: “From where we stand, there should be no increase in gross written premium rates. There should be no increase in insurance premiums for customers next year.”

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