The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Placing general insurance into the ‘VAT-able’ category will have a “disastrous effect” on the Bahamian economy, a leading industry executive arguing that the New Zealand tax consultants were “mixing up apples and oranges”.

Anton Saunders, RoyalStar Assurance’s managing director, told Tribune Business that levying Value-Added Tax (VAT) on property and auto insurance premiums would make this product increasingly unaffordable for many Bahamian consumers and businesses.

Noting that numerous clients were already hard-pressed to meet existing premiums, Mr Saunders warned that the mortgage market and business expansions/investments would further slow if home buyers and companies could not afford the necessary insurance coverage.

Without such protection, he said banks and other financiers will not lend to finance such projects, hurting the already-fragile economy further.

Mr Saunders was speaking after the New Zealand VAT consultants, Dr Don Brash and John Shewan, recommended in their May 6 report to the Government that it consult with the general insurance industry on making it ‘VAT-able’ “within one or two years” of the new tax’s implementation.

This is at odds with the Bahamian insurance industry, which pushed hard for property and casualty insurance - as well as the life and health variety - to be VAT ‘exempt’ after the Government reversed its initial position over the earlier 15 per cent model.

After listing property and casualty (general) insurance as ‘exempt’, the Christie administration suddenly switched the sector into the ‘VAT-able’ category.

This was met with significant, and successful, resistance from the industry, who feared the impact a substantial VAT-induced increase in premiums would have on their customer base.

The sector pushed to be VAT ‘exempt’ on the grounds that, while this would increase its costs (due to being unable to net off their tax input payments) and still result in premium rises, the increase would not be as great as imposing the new tax - now at 7.5 per cent - fully on the consumer.

Indicating that this position remains unchanged, Mr Saunders implied that the Bahamian property and casualty industry would vigorously resist any effort to make it ‘VAT-able’.

“The reality is if the Government puts general insurance in the VAT category, and increases gross written premiums by whatever percentage, there’s going to be a fall-off in the number of people who can afford general insurance,” the RoyalStar chief told Tribune Business.

“We know how troubling it is at the rates now for people to pay their insurance premium at cost and the existing government tax. Any additional pressure on top of that could have a disastrous effect.”

Mr Saunders added: “If you’re talking about having a percentage on that [premium rates] from VAT, the dollar figure is going to increase.

“It’s going to have a disastrous effect on the economy of the Bahamas. If people can’t get insurance, they will not get a loan from the bank. If they can’t get insurance, they will be unable to make their investment.”

There is no suggestion that the Christie administration will ultimately adopt the recommendation from the New Zealand VAT consultants to bring general insurance into the VAT fold several years after the new tax is implemented.

But, given how closely the Government appears to have followed their advice to-date in forming its new VAT model, such a possibility cannot be discounted.

Mr Saunders told Tribune Business that comparisons between the Bahamian insurance market and those in developed countries, such as New Zealand’s, were irrelevant.

He explained that because premium rates in the Bahamas were much higher, due to the potential for hurricane-related catastrophe losses and the market’s small size, the impact from adding VAT to existing premium rates would be much greater here.

“In the insurance sector in New Zealand, rates are nowhere near what is charged in the Bahamas. You are mixing apples and oranges. The comparison is not correct,” Mr Saunders told Tribune Business.

“The underlying rates are way cheaper in those parts of the world than the Bahamas. The New Zealand consultants, with all due respect to them, are mixing up apples and oranges when comparing insurance rates in the Bahamas and insurance rates in New Zealand.”

While the Government’s present policy appears to be one of ‘exempting’ all forms of insurance from VAT, a treatment consistent with most other countries, its final position will not be known until it reveals the revised list of ‘exempt’ industries and products. It is expected to do that imminently - and possibly as early as this month.

However, the New Zealand consultants said both their country and Australia treated property and casualty insurance as ‘VAT-able’.

Messrs Brash and Shewan said in their report: “Once the general insurance industry understood that being taxable meant that they could recoup all VAT paid, relative to a recoupment of close to zero if they were exempt, they recognised the commercial benefits of being included.

“While there was a significant education campaign required, and the actual implementation phase was complex due to the role of reinsurers, agents and other intermediaries, within a couple of years of the October 1986 start date, the system had settled down and operated smoothly. There have been no calls to apply exempt status to the industry, and if efforts were made today to change their status to exempt, there would be significant resistance.”

New Zealand no longer exempts general insurance from VAT as it is possible to “separate and value the service or value-add component”.

“The Mission is not suggesting that general insurance be included in the Bahamian VAT at this point,” Messrs Brash and Shewan concluded.

“The time required for design, education and system changes would be significant, and would result in delays to the implementation date. However, the Government may wish to consult with the general insurance industry with a view to bringing general insurance into the VAT within one or two years.”