Life insurance providers have warned that future subscribers to life insurance policies may find themselves "penalized" to cover the costs associated with administering policies which were priced prior to the implementation of value added tax.
According to industry insiders, companies are waiting to hear from the government if consideration will be given to their position, but no response has yet been forthcoming.
"Depending on how they categorize us, we may end up losing on those old policies so immediately we'd have to reprice those products. We've made representation from the life insurance side of the industry to the government to say we pay one of highest rates of tax now in this country at present, and all we can do is hope and pray they appreciate that we've been major contributors for a long time," said one executive, who spoke on the condition of anonymity so as not to jeopardize ongoing discussions.
The critical factor, according to the executive, is whether insurance products will be classified as "VAT exempt" or "zero-rated" for VAT purposes.
Representation has been made to the government that insurance products should be considered "zero-rated".
Zero-rated VAT items do have VAT on them, but at a rate of zero percent, so the actual VAT is nil. However, the net purchase cost of zero-rated items is still recorded on a VAT return. Critically, suppliers of zero-rated goods/services can still reclaim all of their input VAT - the VAT they will pay on their own purchases.
In doing so, they can reduce their costs. If not, they may end up not being able to charge VAT - if "VAT exempt" - while still paying VAT on their own inputs.
"The way insurance works is if I sell you a life policy, that's for life.
It may be a $100,000 policy, with a premium of $1,000 a year, and that's the contract I have with you. I'm stuck with that. It's not like in the house insurance, medical insurance, car insurance market, where if costs escalate afterwards on any component it's an annual contract we have, which is renewable annually and any additional costs will be ultimately paid by the consumer.
In our case, when costs rise, we can't pass it on (to the customer who took out the policy)." "So VAT will have an impact. It would be deemed to be an administrative cost. If we add that every time our cost goes up its magnified, it's geometric not linear as to what reserves we therefore have to put aside, so the impact to us would be very significant indeed on those old policies and we would have to reprice any new products as a result."
Given the three percent insurance premium tax, the executive noted that insurance companies have traditionally contributed a significant amount to government revenues in comparison to other financial institutions, and the hope is that this will be taken into consideration by the government as it moves ahead with classifying insurance products under the new VAT regime.
VAT is set to be implemented on July 1, 2014.
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