The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

THE Inter-American Development Bank (IDB) has backed industry calls to eliminate VAT on property and casualty insurance, as many policies "did not pay off" following Hurricane Matthew.

The bank, in its assessment of the economic damage and loss inflicted by the storm, called for action to reduce insurance costs that are among "the highest in the Caribbean" in a bid to make private coverage more affordable for a wider cross-section of Bahamian homeowners. It added that the Bahamas suffered from underinsurance and "low insurance penetration", a problem underscored last year by the International Monetary Fund (IMF), which estimated that 60 per cent of Bahamian households - six out of every 10 - lack hurricane coverage either completely or partially.

"Areas damaged by Hurricane Matthew had higher rates of insurance coverage than those damaged by Hurricane Joaquin," the IDB report said. "However, in many cases, even if a building was covered by insurance, deductibles were so high that policies did not pay off, causing homeowners and institutions to absorb all of the financial shock associated with repairs.

"In general, insurance in the country has two problems: Low insurance penetration and underinsurance. One measure to help relieve this problem would be the elimination of the Value-Added Tax (VAT) on insurance policies.

"Insurance rates in the Bahamas are the highest of the Caribbean countries; a typical policy has an annual cost of 1 per cent of covered value, with a 2 per cent deductible. To encourage acquisition of insurance by the private sector, the Government could consider eliminating the VAT on insurance."

This will likely be music to the ears of many in the Bahamian property and casualty industry, who have been intensifying calls for the Government to eliminate the 7.5 per cent levy on such premiums - especially given reinsurance-driven rate increases post-Irma and Maria, which are threatening to put coverage beyond the reach of even more households.

Anton Saunders, RoyalStar Assurance's managing director, told Tribune Business earlier this year that the Government and industry needed to have "a mature discussion" that dealt with all issues surrounding VAT "once and for all", with insurance 'affordability' just one part of such a discussion.

The Bahamas is one of very few nations to levy VAT on property and casualty premiums, given that it is difficult to determine exactly where the 'value has been added' in the production chain.

But this means that insurers are able to 'net off' the VAT paid on their inputs against the 7.5 per cent levy collected from their customers, but also requires that they obtain tax refunds on claims that are paid out.

K P Turnquest, Deputy Prime Minister, acknowledged that the Government and taxpayers will be stuck with an ever-increasing repair bill should catastrophe coverage be priced out of reach of more Bahamians.

Yet he argued that the Government needed to balance this with the revenue lost if VAT was removed from property and casualty premiums. "This is an issue that we have been concerned about even before the election, and one that is of great concern to many Bahamians," Mr Turnquest told Tribune Business in January this year.

"We don't have to go through the issues that are put on the Government, or the burden put on the Government, as a result of the increasing number of residents that are not insured or under-insured because of the cost of coverage today."

The IDB report, meanwhile, called for the Bahamas to further study the acquisition of insurance for public infrastructure assets, as it blamed "less-than-optimal maintenance standards" for the destruction Matthew inflicted in this sector - especially on electricity networks.

"The purchase of insurance for public sector infrastructure should be further studied," it urged. "The Bahamas is a country very exposed to natural hazards, and the resulting disasters have significant effects on public infrastructure. Financial protection should be established starting with new public works.

"For this, it is important to conduct negotiations with private insurance companies to include costs that the Government would incur when buying this service. This policy is followed in other countries, such as Ecuador, where the purchase of insurance for public infrastructure is mandatory."

Turning to the utilities, the IDB report said electricity transmission and distribution networks were typically not covered by insurance because the risk of hurricane damage and associated repair costs were considered so excessive.

"Lack of insurance on this infrastructure also means a lack of pressure from insurance inspectors that would help assure high standards of maintenance, particularly in tree trimming and in replacing old or obsolete poles," the report added.

"During Hurricane Matthew, less-than-optimal maintenance standards contributed to much of the service failure of this infrastructure. Broader cost sharing between pole owners (electricity utilities) and pole tenants (telecommunications companies) would help to fund better utility pole and right-of-way maintenance, thus reducing overall risk not only to these parties but also to those who rely on them.

"The utilities regulator should consider whether it would be appropriate for telecommunications operators to be charged for their tenancy on a per-attachment per-pole basis, rather than on a per-operator per pole basis. There is also a need to review charges paid by the Government for public-sector uses of this infrastructure."

The IDB also called for the creation of a 'Hurricane Fund' to assist power company restoration efforts post-hurricane. "Such a fund would be established under supervision of the regulator, and paid for through a surcharge on electricity bills," the report suggested.

"Payments into this fund would continue until such time as the fund reaches a certain threshold - say $15 million - at which time the funds would be set aside to gain interest through managed investments.

"In the event of disaster that will require a costly expenditure for recovery, power utilities could petition the regulator for release of these funds to defray their expenses. In effect, this would provide power companies with an insurance policy against damage to the distribution infrastructure, with coverage financed by the utility's own customers."