By NEIL HARTNELL
Tribune Business Editor
The Bahamas Insurance Association's (BIA) chairman was yesterday left "speechless" after the government seemingly contradicted itself over VAT's elimination from residential property premiums.
Emmanuel Komolafe, pictured, said he was now questioning the government's commitment to improved insurance affordability and "penetration", after both the deputy prime minister and acting financial secretary told Tribune Business that residential property coverage will be treated as VAT "exempt" rather than "zero rated".
He revealed that this contradicted what KP Turnquest had told him at last Thursday's meeting with the Chamber of Commerce, after he specifically asked the deputy prime minister whether VAT's removal from residential property premiums would result in the product being treated as "zero rated".
"Zero rating" is the most favourable value-added tax (VAT) treatment, as it relieves both the consumer and business from having to pay the levy. But "exempt" status, while still relieving the consumer, leaves the business with the burden of paying VAT on its 'input' costs.
Mr Komolafe expressed fears that VAT 'exempt' status would do little to reduce residential property insurance premiums, as the industry's inability to offset its 'input' tax against that paid by consumers would result in increased business costs that are almost inevitably passed on to Bahamian consumers.
And he warned that this effect will be exacerbated by the VAT rate's rise to 12 per cent, the BIA chairman predicting that the combination with 'exempt' status might lead to an increase - not decrease - in catastrophic coverage costs.
With global reinsurers intensifying pressure for premium rate rises as a result of the multi-billion dollar damage inflicted by the Caribbean's 2017 hurricane season, Mr Komolafe added that any VAT-induced costs increases were especially ill-timed.
He pointed out that such impacts ran counter to advice from the International Monetary Fund (IMF) and Inter-American Development Bank (IDB), which have both called for the Bahamas to make insurance more affordable and accessible as a means to reduce the post-hurricane relief burden on the Government.
"Wow, that is surprising. I'm almost speechless," Mr Komolafe told Tribune Business of Mr Turnquest's comments to this newspaper. "The repercussions of being VAT exempt as opposed to 'zero rated' are that the cost is still being borne and everything is going up by 4.5 percentage points.
"The increase to 12 per cent will still be there, and will still be factored into the pricing. Having taken on that extra cost, even though you're not charging VAT [to consumers], very likely you will pass it on to the consumer.
"On the record, it's fair for you to mention I was part of the Chamber delegation that met with the Deputy Prime Minister," the BIA chair added. "I posed the question to him, and he said it will be zero rated as the policy was to make insurance, residential property insurance, more affordable for Bahamians and residents .
"That will ensure more people take out insurance to cover their own risk, so in the event of a catastrophic event there will be less people relying on government for relief."
Mr Komolafe spoke out after Mr Turnquest and Marlon Johnson, the acting financial secretary, told Tribune Business that the removal of VAT from residential property premiums will be treated as "exempt". Both men said they had to "confirm" this position, but there had been no official notification of any change by yesterday evening.
"It's a total contradiction of the announcements of the Government up to this point," the BIA chairman blasted. "The very fact that we had a very busy hurricane season, there's a great deal of pressure on property insurance premiums, and for the Government to increase VAT to 12 per cent it's a contradiction.
"I question the commitment to affordability and penetration, and reducing reliance on government. At a time when you're talking about an increase in VAT to 12 per cent, the impact on the economy and the impact on disposable income, I'm almost speechless. I don't understand. It defeats the whole purpose."
With "insurance not up there on the scale of priorities" among Bahamian households, Mr Komolafe expressed concern that the combination of 'exempt' status and a 60 per cent VAT rate hike would encourage persons - especially those with no mortgage secured on their home - to either under-insure or drop coverage altogether.
With the Government allocating just $2 million to a 'Disaster Relief Fund' in the 2018-2019 Budget, down from a $2.5 million allocation the previous year, the BIA chairman warned that the consequence of its VAT-related insurance policies could be an increased financial burden should a major storm strike this nation.
He again called for the Bahamas to establish a "comprehensive disaster relief programme", given the ability of hurricanes to throw the Government off-course from the consolidation targets set out in the Fiscal Responsibility Bill.
"The same effort put into the Fiscal Responsibility Bill should also be put into a comprehensive disaster relief programme for the country," Mr Komolafe told Tribune Business. "That's the biggest challenge to any of the objectives of the legislation and fiscal consolidation."
Mr Komolafe added that health and life insurance products, and their affordability, will suffer a similar negative impact from the increased VAT rate.
"It seems to be a dichotomy that in seeking to achieve the objective of being the healthiest nation in the region by 2030, the VAT rate on healthcare and health insurance is being increased from 7.5 per cent to 12 per cent," he said.
"This is also at odds with the Government's goal of increasing access to quality and affordable healthcare in The Bahamas. It is noteworthy to state that VAT is being eliminated on medicines and not healthcare. In relation to life insurance products, the increase in VAT rate to 12 per cent will impact the premiums on these products. While they are exempt, the increase in VAT will impact the pricing of these products."
The BIA chief added: "We had expected that measures introduced by the Government in the Budget will make insurance (that is, life insurance, health insurance and general insurance) more affordable and accessible to Bahamians and residents.
"This would have facilitated an increase in insurance penetration across our archipelago of islands and enable more persons to insure their own risks while reducing dependence on the Government. The Budget communication does not appear to have achieved this objective."