The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s proposal to levy 15 per cent Value-Added Tax (VAT) on property and casualty insurance premiums was yesterday described as “a recipe for disaster”, although the Government has indicated a “willingness” to listen to industry concerns.

Howard Knowles, the Bahamas Insurance Association’s (BIA) chairman, likened VAT’s potential impact to the effect post-Hurricane Andrew rate rises had in 1992, when 35 per cent of homeowners were estimated to have dropped coverage.

He described the industry’s “main concern” over VAT as being a potential “market contraction” and “loss of business”, given that adding 15 per cent to premium prices might make insurance unaffordable for many Bahamians and homeowners.

The result, Mr Knowles said, would be homeowners and motorists either electing to drop insurance coverage altogether or underinsuring, with all the negative consequences that might bring.

Tribune Business understands that John Rolle, the Ministry of Finance’s financial secretary, informed the insurance industry last week of the Government’s plans to effectively split it ‘into two’ in terms of its treatment under VAT.

While property and casualty insurers would have to levy 15 per cent VAT on customer premiums, and register with the Government to pay this, the life and health insurance sector will be ‘VAT exempt’.

There are advantages and disadvantages to both positions. While property and casualty insurers will be able to claim ‘refund credits’ for VAT paid on inputs, consumer prices will be hiked.

As for the life and health insurance industry, while they would not have to levy 15 per cent VAT on premiums or register with the Government, they will not be able to claim ‘refund credits’ on their inputs.

Either way, costs across the insurance industry are set to rise if the Government sticks to its current plans, and these increases will almost inevitably be passed on to the consumer through increased premium prices.

Mr Knowles yesterday told Tribune Business that the Bahamian insurance sector, as a whole, felt consumers “could not withstand such a hike in premiums” to the tune of 15 per cent VAT.

He suggested that its imposition, if the Christie administration proceeded with its current plans, would lead to a “market contraction” in the property and casualty sector.

Persons would likely drop comprehensive auto insurance coverage for cheaper third party policies, Mr Knowles said of the likely ramifications, and underinsure their homes. Some, he suggested, might choose not to insure at all.

“We don’t want a situation on the property and casualty side where that 15 per cent is tacked on to prices, because we think our prices are very sensitive, and adding that 15 per cent hike would lead to a loss of business,” Mr Knowles told Tribune Business.

“That’s our main concern. We think, I’d almost go as strong as saying, it’s a recipe for disaster for our industry.”

Mr Knowles pointed to the aftermath of Hurricane Andrew, when insurance rates went from $0.45 to $1.05, as a likely indication of what would happen if a 15 per cent VAT levy was imposed on property and casualty premiums.

“We estimated then that 35 per cent of people who took out homeowners catastrophe coverage would have dropped insurance,” he told Tribune Business.

“We had a fall-off of 35 per cent, and over time 5 per cent of those people came back, but the other 30 per cent were never recovered.”

Such a fall-off would have major implications for a nation in the hurricane belt.

“If there’s a major catastrophe, the ability for the nation to recover is going to be seriously compromised because there’s fewer people insured. It’s going to be a government social problem,” Mr Knowles told Tribune Business.

“I’m sure no one wants that. We understand the Government needs to generate revenues, and are willing to co-operate to that end, but you can’t do that at the expense of crippling our industry.”

The Government’s rationale for splitting the insurance sector into ‘two’ is understood to be that life and health insurance represents ‘savings and investments’ activity, and are thus ‘socially desirable’.

However, even if they were categorised as ‘VAT exempt’, life and health insurers would not escape VAT’s reach ‘scot free’.

“By our calculations, it would be a substantial knock on their bottom line,” Mr Knowles said of VAT’s impact on life and health insurers.

The BIA chairman was part of an industry delegation that yesterday took its concerns to a meeting with Michael Halkitis, minister of state for finance, an occasion that Mr Knowles described as “cordial” and “open”.

While the Government did not promise to reverse its ‘VAT on insurance’ position, Mr Knowles said: “They [the Government] listened to our concerns, and they expressed that it was not their desire to deter anyone from doing business.

“We’ve begun dialogue. They’re willing to listen to what we have to say, and they asked us to come back with cold, hard figures to back up what we’re saying.”

The BIA chairman said the insurance industry accepted that “at some level, taxes are going to have to rise”. But the key issue was how this would happen, and the mechanisms employed.

Mr Knowles said the industry had pointed out to the Government that it already paid a 3 per cent premium tax, which was used to finance the Insurance Commission, meaning that it would effectively be ‘double taxed’ under VAT.

“For many years we were paying more as an insurance industry than the banks contributed,” he added. “We were saying [to the Government] that whatever we end up with has to be fair and level. There’s no indication premium taxes are going to go down.”