The Minister of Finance tabled a proposed half-a-percentage-point hike in VAT to 15.5% this year and a further half-a-percentage-point increase next year, to 16%. This move has significant implications for the insurance industry and its consumers.
Short-term insurance is subject to VAT, so the increase will impact all insurance policyholders. If a policyholder spends R100 on insurance and the VAT portion increases from R15 to R15.50 this year and to R16 next year, something has to give. Customers may need to choose between reducing cover, increasing excesses, or looking for “no frills” alternatives.
Insurance companies are under pressure to stay relevant, but South Africa’s weak economy and flat GDP growth make it increasingly difficult. With consumers struggling to manage rising costs relative to their income, many are questioning whether insurance is worth it. This poses a significant challenge for the industry, because most insurers are grappling with stagnation.
In addition, a VAT change is operationally challenging: VAT is a cost of compliance. It does not add any revenue to insurers, which are burdened with the responsibility of collecting the tax, as well as the complexity of implementing changes to their internal systems.
The VAT changes will necessitate additional communication to insurance buyers over the next two years (because the increase is staggered), notifying them of the price increase and that sums insured need to be adjusted, which may be confusing.
The insurance industry is struggling to manage increases in the average cost of claims because of the impact of climate change, growing risk concentrations, and steep inflation on motor repair and building costs. Significant premium increases have been seen over the past two years, and although this trend appears to be tapering off, a VAT increase will of necessity trigger a fresh round of reviews of insurance policy terms.
The impact is higher than it appears at first glance – a VAT increase from 15% to 16% represents an increase of 6.7% in the amount of tax paid. Although it is an easy tax to raise and provides immediate revenue collection, it can be an indiscriminate instrument.
Most of the population is experiencing financial hardship. A VAT hike indicates that we may be living beyond our means as a country and puts a dampener on economic growth over the long term.
A widening protection gap
A pattern has emerged regarding the response of insurers to a recent series of crises – insurers tend to reduce or withdraw cover. This has led to a widening protection gap.
The Covid-19 pandemic has led to infectious disease exclusions from policies. In South Africa, the power crisis has had a similar effect. Insurers have restricted coverage for power surge-related damage. Similarly, in the United States, several insurers withdrew from California before the major wildfires that occurred in January, given what their predictive models were saying. This leaves ordinary policyholders struggling to find cover for the risks that concern them most, and further challenges may start to emerge.
We already know that certain areas in South Africa are prone to flooding. It is foreseeable that insurers will start avoiding high-risk regions, such as parts of KwaZulu-Natal, effectively leaving homes and businesses without sufficient protection.
As climate risks intensify – runaway wildfires, severe storms, and heavy precipitation – insurers’ ability to respond effectively is shrinking. Global reinsurers are also reviewing their appetite for these types of risk, making it even harder for South African insurers to offer full cover.
In the Budget, R1.7 billion has been allocated to respond to future disasters over the medium term, while R4bn is provisionally allocated to address backlogs in recovery efforts for provinces and municipalities.
The government has also signalled it is open to public-private partnerships to address uninsurable risks. This a positive lens through which to view the increase in VAT, where this goes towards funding the much-needed building of resilience of vulnerable communities to disasters. The insurance industry is ready and able to play its role, working with the government, to improve the capacity to deliver on this promise.
Charles Nortje is the managing director of Old Mutual Insure.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
