By NEIL HARTNELL
Tribune Business Editor
The insurance industry's last-ditch bid for a one-month VAT extension has failed, with its chairman yesterday expressing concern over potential policy lapses and benefit losses.
Emmanuel Komolafe, the Bahamas Insurance Association's (BIA) principal, told Tribune Business he had been talking to the deputy prime minister and acting financial secretary up until the end of last week in a vain bid to obtain "a smooth transition" for Bahamian policyholders.
In particular, Mr Komolafe expressed concern over whether health insurance policyholders with imminent renewals/premium payments will adjust in time to the new 12 percent VAT rate.
Failure to do so, he warned, could result in policies lapsing or clients "being out of benefits" just when they needed it most should a medical emergency arise.
As for property and casualty insurance, Mr Komolafe said the sector was worried the 60 percent VAT rate hike would result in consumers failing to appreciate that the sum insured under their policies had increased.
While residential property premiums are now treated as VAT "exempt", the BIA chairman said housebuilding and construction repair materials will attract the higher 12 percent VAT rate.
These increased replacement costs drive the sums insured under a property insurance policy, and Mr Komolafe warned that failing to adjust to the VAT increase's implications could leave Bahamian homeowners underinsured and responsible for a significant chunk of post-hurricane repairs - something that was often only discovered at "the worst possible time".
Revealing the industry's last-minute push for a longer VAT transition, Mr Komolafe said: "We had tried up until last Thursday or Friday last week. I was in communication with the deputy prime minister [KP Turnquest] and financial secretary [Marlon Johnson] to provide for a one-month extension to allow for these changes to occur and allow a smooth transition.
"One of our major concerns was the ability of clients to adjust to the higher payment to reflect the new VAT rate of 12 percent, and avoid policies lapsing. That will be a challenge."
Mr Komolafe said all Bahamian health insurers had sent notices to policyholders, including taking out full-page newspaper advertisements, and were reinforcing this message through their websites and sales forces in a bid to prevent this happening.
Yet he, and the industry, remain concerned that some will not adjust direct debits, salary deductions, and pre- and post-dated cheques to account for the higher VAT payment in time to prevent their coverage expiring.
"Failure to do so will result in the policy lapsing or being out of benefits," the BIA chairman told Tribune Business. "The challenge there is that health is so important; you don't want any interruptions or disruption to these services. You don't want persons to get to the clinic, hospital and find their policies have lapsed or they are out of benefit."
As for property and casualty insurance, Mr Komolafe said renewal notices for motor, residential and other policies set to expire in July and August would have gone out several months ago - before the VAT rate hike's unveiling on May 30.
He added that the increase "could be quite disruptive to thousands of clients" who now have to find additional dollars to finance their coverage, with the sector - through the BIA - taking out newspaper advertisements to ensure Bahamians do not face an unexpected "gap" in their residential insurance.
While insurance on residential dwellings is now VAT 'exempt', Mr Komolafe said this was not the case for homebuilding and repair supplies, where the tax rate has increased from 7.5 per cent to 12 per cent.
"What we're saying is that the unintended consequence of this action is that the replacement and repair cost for dwellings will increase," he told Tribune Business. "We're warning the insuring public that, as a result of this, that property will be underinsured or not insured to its true replacement costs."
The BIA ad, spelling out the consequences, states: "Property and casualty insurance member companies of the Bahamas Insurance Association hereby notify the insuring public that when replacement costs increase, the sums insured must also increase. Otherwise, the property may become underinsured or not insured to its true replacement cost."
The Association added that all property insurance policies include an 'averaging' or 'underinsurance' clause, the effect of which is to make policyholders responsible for the extent of the underinsurance - they effectively become their own insurance. "This is often discovered at the worst possible time; at the time of a claim," the BIA added.
Mr Komolafe said the BIA had used the example of a $200,000 home that was only insured for $150,000, or 75 per cent of its replacement amount. As a result, the homeowner or 'insured' is left responsible for "self-insuring" the remaining 25 per cent or $50,000.
"If there is damage, the insurer is responsible for only 75 per cent of the loss," the BIA chairman explained. "We're asking persons to look at how they can increase their sums insured or have a conversation with their insurance companies as to what this means for them."
And the BIA advertisement warned: "Take action today to adequately insure your property. Failure to take prudent steps may place you, the insured, at risk of having claims reduced by the proportion of underinsurance."
Mr Komolafe yesterday reiterated that 'exempting' residential dwelling insurance from VAT was "not the best approach" if the Government's objective was to make coverage more affordable - something highlighted by the BIA advertisement.
And, with VAT reducing consumers' disposable income and purchasing power, Mr Komolafe said many Bahamians were likely to view insurance as "very low on the priority list" - raising fears of a drop-off in coverage across-the-board.
"We have to monitor this and see how it plays out," he added.