The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A leading Bahamian insurer has expressed concern about a potential “one-time” balance sheet hit if claims reserves are not sufficient to absorb the 7.5 per cent Value-Added Tax’s (VAT) inflationary impact.

Patrick Ward, Bahamas First’s president and chief executive, told Tribune Business that underwriters might have to increase their claims reserves, and lower their retained earnings, if actuarial valuations determined the former were not enough to cover VAT-induced inflation.

He added that the Bahamas Insurance Association (BIA) was set to reform the committee that had been dealing with VAT “to look at this in detail”, now that the Government had formally announced its restructured VAT proposal.

“We have to reassess the impact of a lower level of VAT for the inflationary affect on the valuation of claims reserves,” Mr Ward told Tribune Business.

“The discount, or future values, are going to be higher because of the inflationary impact from VAT.”

The Government has projected a 4 per cent increase in prices from a 7.5 per cent VAT, a projection in line with the Coalition for Responsible Taxation’s 3.8 per cent. Others, though, have suggested without any compensating decrease in Customs and Excise Taxes, the impact may be closer to 7.5 per cent.

Whatever the impact turns out to be, Mr Ward explained that it would impact the level of reserves Bahamian insurance underwriters have to hold to meet likely future claims demands.

Claims reserve projections are calculated by actuaries, and inflation estimates are one of the variables they employ to determine the correct sum.

A VAT-induced rise in inflation would thus increase the value of future claims payouts, and thus require insurers to raise their claims reserves levels to cope with this.

“That might cause some impact on balance sheets,” Mr Ward told Tribune Business, “because the actuarial valuations are going to come up with a higher level of reserves because of inflation.

“It would mean that reserves on the books would have to be adjusted because of the inflationary impact of VAT.”

The Bahamas First chief added: “If the level of current reserves is not sufficient to account for a 7.5 per cent VAT impact, it will be a one-time hit - increasing claims reserves and reducing retained earnings in the year the adjustment is made.”

With claims reserves treated as liabilities, and retained earnings an asset, should the former have to increase, a Bahamian underwriter will see its liabilities rise and assets decrease. As a result, its net asset position and balance sheet strength would weaken.

Mr Ward said this situation coincided with the Insurance Commission’s plans for Bahamian general insurers to have “mandatory annual reviews of the claims reserves”.

While this is not currently mandated by law, Mr Ward said life and health insurers already undergo such reviews. And the plan was for the property and casualty sector to be brought into this “at some point”.

The Bahamas First chief executive said the revised VAT proposal meant the insurance industry needed to “look at the full issue all over again”.

Although the Government’s last position was that insurance will be VAT ‘exempt’, something the industry wanted, it is unclear if this remains the case given that the new Bill and regulations have yet to be published.

Calling for this to happen as quickly as possible, Mr Ward said: “That’s very important, because if we do need to adjust how we capture data to have an accurate assessment of input recovery, we need to have that in our system.

“Changes take a lot of time to test and validate.”