...premiums to go up

Insurance companies are howling about the inclusion of their products in the new VAT-net, which they fear could further inflate premiums paid on insurance policies.

The insurance industry has over the years been exempted from VAT. However, the coming into force of the new VAT law last week, which has seen the VAT rate raised from 15% to 17.5%, requires insurance companies to charge the new rate on non-life insurance products.

Kwame Gazo Agbenyadzie, President of the Ghana Insurers Association (GIA) - the trade association of insurance and reinsurance companies, has warned that the new VAT rate will end up hitting consumers in the form of higher premiums. Mr. Agbenyadzie told the B&FT during an interview in Accra that such hikes will only increase the strain on individuals and businesses trying to comply with the laws that mandate them to buy or provide insurance.

“The likely effect we will see is that if the VAT is implemented and charged on the premium, we’ll pass it on to the final consumer. Motor insurance, for instance, is compulsory and that is where a lot of people will be affected; because if motor insurance goes up it is likely that the transport unions will adjust transport fares accordingly to reflect the increment, and that will impact on the cost of transportation and food as well as other fast-moving goods.

“Two years ago, we tried to increase motor premiums moderately and the government intervened,” he said.

The new VAT law puts Ghana among only a few countries in the world that charge a consumption tax on insurance at a time the industry is struggling to expand. Currently, insurance penetration in the country is less than two percent in a market operated by 43 firms in both the life and non-life insurance sectors.

The Ghana Reinsurance Company says never in its work as the country’s foremost reinsurer has it come across VAT on insurance, saying: “In our dealings with the outside world, we have never come across VAT on premium. What we know is tax on premium leaving the country. For instance in Zambia it is 0.18%, Egypt is 5.8%. VAT on premium will make people pay more”.

Mr. Agbenyadzie said the introduction of the new VAT rate to insurance will most likely push premiums up and make insurance costlier, which will impact negatively on the demand for insurance and insurers’ business.

“Insurance has an elastic demand and we have very low insurance penetration rate in this country. We are now trying to get people to buy non-life insurance products because we believe that if people insure their own assets, in the event of any misfortune they can be compensated adequately instead of them appealing to government for help -- which would create a social burden for the state.

“So the application of VAT on insurance in the form now, which will be charged on premiums, will affect the demand and the purchase of insurance products. If that happens, companies will not be able to generate enough business to be able to make profit and pay corporate tax and the revenue from the VAT that government is expecting will not come.

“We also think that this can also be politically sensitive, especially on motor insurance, because premiums will have to go up immediately by 17.5% -- which will be a very difficult thing to sell at this time,” he said.

He said the insurance players have been shocked by the VAT introduction and will seek an audience with tax authorities on the best way forward for its implementation.

“Of course, insurers have not been prepared for this because we need to do a lot of education and reconfigure our computer systems -- so we need to actually engage the tax authorities to seek clarification and also find the best way that it can be implemented without creating any upheavals in the system.

“We were in fact surprised and shocked to read that VAT will now apply to insurance...This will make insurance cost in Ghana uncompetitive and more expensive than it is in other countries in the West African region.

“We have many companies from other jurisdictions who are doing business in Ghana, and if insurance premiums become more expensive they will advise themselves as to whether to even insure or buy the insurance here in Ghana. Even though the law requires assets in Ghana to be insured locally, it is not compulsory that businesses insure their assets. So they will have options,” he said.

A financial consultant, Dr. Daniel Seddoh, also expressed his disappointment with the introduction of VAT on insurance, describing it as “ill-conceived” and a desperate move to raise revenue.

He said the tax will weaken the financial standing of both the insured and the insurer to do business at a time that insurance penetration is low.

“This is the first time we are seeing VAT on insurance in this country, which means the tax on insurance products is moving from zero to 17.5% -- unlike the others that we are only adding 2.5% to.

“So the effect of the VAT will be significant for people buying insurance. We are in essence taking away people’s capital in that insurance is a mechanism for protecting capital, which is an asset people use to work, so that in the event something happens to that capital, one can get insurance or have the asset replaced for work to go on.

“As we have introduced VAT on insurance, businesses that want to buy a machine to expand are being asked to donate 17.5% to government. What if they don’t have the 17.5%, what happens? They will not buy the machine.

“In this country, insurance penetration is low and people do not have appetite for it. So as people are being encouraged to buy insurance and the industry itself is struggling to expand, slapping on a tax like this is a disincentive.

“The likely effect of this VAT on insurance is that people will not take or buy insurance. When they are in distress, they will run to government -- and we have seen that with the fire outbreaks in recent times.

“We are encouraging people to buy and use this same insurance as an avenue to raise tax, and I think present developments show that there is a problem with the thinking process.

“VAT on insurance is a desperate measure and I am disappointed. There are better ways of doing things than introducing 17.5% VAT on insurance. Perhaps it was a mistake and somebody overlooked it, and so we need to correct it. For me, it’s a bad policy and the idea of VAT on insurance is ill-conceived,” he said.