The consequences of non-insurance and underinsurance that many in the insurance industry believe will result from adding value-added tax to premiums "will ultimately be placed at the feet of the government", a leading sector stakeholder has argued.
Emmanuel Komolafe, chairman of the Insurance Advisory Committee (IAC) and the sector's representative on the advisory committees on VAT, further cautioned that while it appears that the government determined that being VATable was the best option for non-life insurance products in The Bahamas, based on the experience of general insurance companies in New Zealand, this cannot be concluded to necessarily be the same for The Bahamas without "proper consultation".
"While we do not agree or disagree at this point (about whether it is the best outcome), we believe that proper consultation and detailed discussions on this position prior to adoption is essential...There are some local industry dynamics, including the cost of insurance, method of payment of claims, reinsurance costs, size of the market and elasticity of demand for insurance products in The Bahamas, that need to be considered."
The IAC chairman also confirmed, however, that the Ministry of Finance has expressed its commitment to remaining in talks with the insurance sector heading toward the implementation of the tax in January 2015.
Komolafe commented after newly-released VAT legislation identified life insurance and annuities as products that will be treated as VAT 'exempt', while health, property and casualty insurance will be taxable at 7.5 percent - a shift from an earlier position taken by the government which exempted all insurance products.
Komolafe, chief risk and compliance officer for Colina Holdings Bahamas Ltd., agreed with other industry representatives yesterday that concerns that this stance will lead to an increase in noninsurance and underinsurance among the Bahamian public are "valid".
Komolafe added that the consequences of this outcome will "ultimately be placed at the feet of the government either in the form of increased demand for public healthcare or additional strain on the public purse in the event of disasters."
However, he noted that the insurance industry had been meeting with the government in the run-up to the release of the legislation, after initially hearing of the government's plans to pursue a "fewer exemptions, lower rate" model as suggested by visiting experts from New Zealand and will continue to do so, leaving open the possibility that the final outcome may see the industry's treatment under the tax regime tweaked.
Komolafe said: "The government has promised to work with us in the coming months in this regard, and we are hopeful that the discussions will result in an outcome that the industry is comfortable with.
"The insurance industry agrees that there is an urgent need for fiscal reform and welcomes dialogue with the MOF on how we can assist in this regard. However, we need more clarity on the details of implementation, including how the system will work, what VAT input credits can be obtained and any potential relief in the form of premium tax reduction to ensure that we come up with the best possible outcome," said Komolafe.
The insurance representative added that it was also the case that the previously "exempt" position into which the industry fell was not ideal, but a "lesser of two evils" scenario.
The was because an entity cannot charge VAT on exempt supplies and is unable to recoup VAT paid or obtain VAT input credit on such supplies. Hence, there would have been an increase in operating costs and reserves, which would have had to be indirectly passed onto consumers either in part or in full.
In what Komolafe called a "silver-lining", the government determined that VAT will only be imposed on health, property and auto insurance come June 30, 2015, some six months after the initial implementation.
"The government, in recognition that this is a significant deviation from what was originally agreed with the industry, is proposing that the exemption for all insurance products (including non-life insurance products) should be in force until June 30, 2015 to give the industry ample time to prepare. It is unclear why the government partly deviated from the recommendation of the New Zealand consultants that they should consult with the general insurance industry on making general insurance products taxable within one or two years," he said.
Komolafe added that the proposed timeframe for implementation is also much shorter than had been recommended by the New Zealand consultants.
The IAC, which Komolafe chairs, consists of and has representatives from several industry associations and participants including the Bahamas Insurance Association (BIA), Bahamas Insurance Brokers Association (BIBA), Life Underwriters Association of The Bahamas (LUABH), the Insurance Institute of The Bahamas (IIB), Insurance Professionals Association (IPA), Bahamas Institute of Chartered Accountants (BICA) and claim adjusters.

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