The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Value-Added Tax (VAT) will “definitely increase” insurance premiums regardless of the tax treatment applied to the sector, a senior executive warning it will also “squeeze payment” terms throughout the industry.

Vibert Williams, head of Netherlands Antilles General Insurance Company (NAGICO) Bahamas, told Tribune Business that the proposal to levy a 15 per cent VAT on property and casualty premiums would impose a heavy compliance burden on small agents and brokers.

Hinting that such intermediaries might lack the finances and skills to deal with VAT implementation, and may not survive, the NAGICO (Bahamas) head said the full burden of the new tax would likely fall on consumers because the insurance sector “doesn’t make 15 per cent profit margins.

Mr Williams is able to speak on VAT from a position of experience, having witnessed its implementation in other Caribbean countries – notably St Lucia – where he has worked previously.

He confirmed to Tribune Business that two consequences stemming from VAT’s introduction in St Lucia were a 15 per cent increase in claims costs, plus a rise in vehicle write-offs because the new tax often meant repair costs exceeded the damaged vehicle’s value.

“The most direct effect was on the expenses of the insurance companies – electricity costs, commercial leases and claims,” Mr Williams said of the sector’s VAT experience in St Lucia. “The insurance companies paid tax on lawyer’s fees, adjuster’s fees. All of these things now become taxable, and that is a direct cost back to the insurance company.”

However, Mr Williams was quick to acknowledge that the Bahamas’ proposed VAT treatment for the property and casualty insurance industry is totally different to St Lucia’s approach.

The southern Caribbean nation treats the sector as VAT ‘exempt’, meaning that while it does not levy a 15 per cent tax on insurance premiums, the industry cannot claim ‘refund credits’ for the VAT paid on its inputs.

The Christie administration, though, is eyeing the opposite approach for the Bahamas. It is proposing to charge the 15 per cent VAT on property and casualty premiums, a move that would, though, allow the Bahamian insurance industry to claim those ‘refund credits’ on its inputs.

But, either way, Mr Williams warned that the Bahamian public was set to experience an increase in property and casualty premiums when VAT takes effect on July 1, 2014, because of its impact on the industry’s cost base.

“Either way, with the implementation of VAT we may see insurance premiums rise,” Mr Williams told Tribune Business. “It comes down to two things: The insurance companies need to determine whether to eat the cost or pass it on, and in most cases it is passed on, as most of us are not making 15 per cent profit margins.

“In my estimation, whether exempt or not, there’s definitely going to be an increase in insurance premiums.”

The only unanswered question is to what extent, given that the Bahamian property and casualty sector is unlikely to be successful in its objective of becoming ‘zero rated’ for VAT purposes. Such status would allow it to avoid charging 15 per cent VAT to its clients, while still claiming the refund credits on its inputs.

One insurance industry executive, speaking to Tribune Business on condition of anonymity, described VAT ‘exempt’ status as “the lesser of two evils”.

They added: “To us, that’s far more preferable to explaining a 15 per cent across-the-board increase to clients, and then have to track it [VAT], collect it and pay it as unpaid tax collectors for the Government.”

Mr Williams, meanwhile, said the most concerning VAT-related impact for the insurance industry was the likely upsurge in uninsured/underinsured motorists and homeowners.

Pointing to the $3,000 average annual ‘all-perils’ premium paid by homeowners in the Bahamas, the NAGICO (Bahamas) chief said the proposed VAT would add $450-$500 to this cost. Many are struggling to pay this sum as it is, and the new tax could place coverage out of reach.

“That’s absolutely the danger,” Mr Williams said of the possibility of Bahamian homeowners not insuring or underinsuring. “That’s what we will find. Most people are supposed to revalue their homes and increase the value as time goes by, but I’ve seen from other places that people don’t do it, because they can’t afford it. If it’s a choice between milk and insurance, there’s no choice.”

Mr Williams added that VAT’s implementation would also hit the payment terms agents/brokers could offer to their motorist/homeowner clients, and negatively impact ‘accounts receivables’ positions throughout the industry.

And he warned that VAT compliance costs might drive some small agents and brokers out of business. “They have to develop a whole lot of internal VAT compliance competence, and a lot of them are small agents and brokers why may not have the money, time and skills to deal with VAT compliance,” Mr Williams told Tribune Business.

“Because VAT is levied on the insurance, not the collection, those agents may put a squeeze on the payment terms offered to clients; they are not going to front you the VAT. All of this is a knock-on effect from the way the VAT is charged.”

Tribune Business was told that virtually all agent and brokers ‘worth their salt’ generated over $100,000 per annum in premium income (turnover), meaning that would have to register by law to pay VAT.

Yet some of these companies have just two-three employees, meaning VAT administration and compliance will impose a heavy burden. And the Government’s own costs/administrative resources will be stretched by having to monitor these small brokers and agents.

One broker, speaking to this newspaper on question of anonymity, echoed Mr Williams’ concerns about VAT’s potential impact on client payment terms and the build-up of receivables right through the industry chain.

Many homeowners are allowed to pay their insurance premiums over a 90-day period, and a question being asked by the industry is whether the VAT will have to be 100 per cent paid upfront, or carried (spread out) over that period.

The broker said it was “not uncommon” for large commercial risks to pay premiums in quarterly installments over a year, raising further concerns about any ‘upfront’ payment of VAT and the industry having to ‘carry’ the tax burden for their clients.

And they also questioned whether sub-agents would have to levy, and register to pay, VAT, plus how agents/brokers who dealt with both segments - property and casualty, and life and health – would be treated under the new tax regime.

Guilden Gilbert, a former Bahamas Insurance Brokers Association (BIBA) president, told Tribune Business that VAT could negatively impact two sets of accounts receivables – those owed by clients to brokers and, in turn, by the brokers to the underwriters.

Bahamian brokers and agents are supposed to pass the premium income they receive on to the policy underwriters, earning a commission for their services. However, there have been several well-publicised episodes in the recent past where agents and brokers have failed to do this, leading in some cases to their being taken over by the creditor underwriter.

Expressing concern that VAT might exacerbate this situation, Mr Gilbert told this newspaper: “I think you may find a number of brokers and agents have some receivables matters now, and this could have some impact increasing receivables owed to them.

“If there are persons having problems with paying their insurance premiums now, it’s [VAT] not going to make it any easier for them. In the big scheme of things, we feed the premium on to the carriers, so VAT might have an impact on the receivables owed by clients to brokers, and in turn from brokers to insurers. It could definitely have an impact on the intermediaries.”

Another broker, speaking on condition of anonymity, described the Government’s proposal to levy 15 per cent VAT on the property and casualty insurance industry as “ridiculous”.

They argued that such a move was inconsistent with best international practices, as the sector was treated as ‘exempt’ in virtually all other countries with VAT, including those Caribbean nations that had recently adopted the tax.

Pointing out that the Government’s own VAT ‘White Paper’ said financial services were to be treated as ‘exempt’, the broker questioned why, if insurance was not a financial service, it had been placed under the Ministry of Financial Services.

“They haven’t thought it through,” the broker said of the Government. “They’re making it up as they go along. They’re realizing it won’t be the wonderful money spinner they thought it would be, and think they need to get more industries.

“It’s very difficult to work out where the value is added from insurance, and it’s too complex. This will be resisted totally. They [the Government] will regret it totally. A lot of insurance intermediaries will not survive.”

NAGOCO’s Mr Williams added: “It’s going to be an interesting and challenging year once VAT is implemented.

“The good news is that people will find ways to continue in life and business, and eventually the market will guide them back to some semblance of order, but the initial shock will be felt.”