The anticipated impacts of introducing 21% VAT on non-life insurance policies in 2024

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Taxation plays a significant role in shaping the dynamics of various industries, and the insurance sector is no exception. It serves as a source of revenue for the state which is used in developing the economy. The introduction of the 21percent VAT system on non-life insurance policies (insurance premiums) which is expected to take effect in 2024 at first glance might seem to be a straightforward process:

  • Assume a risk and proceed to underwrite the business
  • Collect a higher premium from the insured or policyholder
  • Remit or pay the VAT amount on the premium to Ghana Revenue Authority (GRA)

This appears to be the normal routine cash-in and cash-out scenario, business as usual. However, have we considered the intricacies and potential challenges that may arise?

The implementation of a 21percent Value Added Tax (VAT) is poised to exert a substantial influence on both mandatory and voluntary non-life insurance policies underwritten in Ghana. The impacts on non-compulsory policies are expected to be more pronounced in comparison to obligatory policies such as motor insurance, where it is assumed that policyholders will secure coverage regardless of potential price increases because of it compulsory nature.

This article looks at the definition and ACT governing VAT in Ghana, the expected impacts of the 21percent VAT on policyholders and the insurers and recommendations to assist policyholder and insurers in navigating through the expected challenges.

What is Value Added Tax?

Value Added Tax (VAT) is a tax applied on the value added to goods and services at each stage in the production and distribution chain. It forms part of the final price the consumer pays for goods or services. In some countries it is called ‘Goods and Services Tax’ or GST. VAT is an example of indirect tax imposed by the government. An indirect tax is a tax imposed by the government on goods and services purchased by the consumer. The consumer ultimately covers the cost of the indirect tax, which is incorporated into the market price of the goods or services.

Act Governing VAT in Ghana

Value Added Tax (amendment) Act 2022 (Act 1082) is the ACT that governs the implementation of VAT in Ghana.  The Act requires a taxable person to issue a tax invoice through a certified invoicing system and ensure that the Certified Invoicing System is integrated into the invoicing system of the C-G. The purpose of the new amendment (Act 1087) is to strengthen the compliance with Act 1082 by providing penalties for non-compliance with the Certified Invoicing System. The Act 1087 has prescribed penalty for VAT registered persons that don’t adhere to the new provisions of Act 1082.

Differences between Insurance Premium Tax (IPT) and Value Added Tax (VAT)

Insurance Premium Tax (IPT): IPT is a tax applied directly to the premiums paid by policyholders for insurance coverage. It is a specific tax levied on the insurance transaction itself. The tax is paid directly to the government.

Value Added Tax (VAT): VAT is applied to the entire value of the insurance premium, but it is not exclusive to premiums. VAT also applies to other elements of the value chain that insurers provides to its customers.

Expected impacts of vat on policyholders

High Cost of Insurance:

Policyholders should expect increase in cost of insurance premium. The introduction of Value Added Tax (VAT) will inherently lead to a surge in the cost of insurance for policyholders. With the addition of VAT to premiums, customers will bear a higher financial burden when purchasing insurance coverage. This increased cost could potentially deter some individuals or businesses from obtaining the necessary insurance, impacting overall insurance penetration which is currently less than 2percent.

For example, Motor insurance premiums are expected to be increased by more than 30percent from January 2024. The increase is due to a 21percent increase in Value Added Tax (VAT) that will be imposed on non-life products from January 2024, in addition to at a 10percent increase in Motor Insurance Premiums.

Reduction in Benefits in the Event of a Claim

As a direct consequence of the elevated premiums inclusive of VAT, policyholders may experience a reduction in the benefits received in the event of a claim. The higher cost of insurance can result in insurers adjusting their payout structures or coverage terms to manage the increased financial load imposed by VAT. This, in turn, could diminish the value proposition for policyholders, leading to concerns about the adequacy of coverage during critical situations.

Expected impacts of vat on insurers

Increased Administration burden and cost for insurers

The imposition of Value Added Tax (VAT) on insurance premiums places a substantial administrative burden on insurers. Given the substantial volume of daily transactions handled by insurance companies, accurately addressing these VAT irregularities would prove exceedingly challenging.

The integration of VAT into billing and accounting systems is imperative, leading to heightened complexities and increased operational costs. A thorough evaluation of the existing IT infrastructure is essential, necessitating potential re-configurations to ensure the generation of VAT-compliant outputs. Ensuring that staff and intermediaries possess a comprehensive understanding of VAT becomes crucial. These adjustments and enhancements in systems and expertise, however, incur additional expenses for insurers, thereby impacting overall profitability.

Competitive pressures

The introduction of Value Added Tax (VAT) on premiums may intensify competitive pressures for insurers, with policyholders actively seeking more cost-effective alternatives. This heightened competition could prompt insurers to reevaluate their pricing strategies, placing a renewed emphasis on enhancing cost efficiency within their operations.

Presently, within the industry, a challenge persists known as premium undercutting, wherein insurers set lower premiums as against regulatory requirements, to enhance competitiveness and secure a larger market share. The introduction of VAT on premium carries a significant risk of increasing premium undercutting.

Impact on profit margins

The additional VAT may impact insurers’ profit margins, especially if they are unable to pass on the full tax burden to customers due to competitive pressures from their competitors.

Product adjustments

For insurers to remain competitive and stay relevant in the industry, they must introduce add-ons or develop new products to align with customer preferences and market dynamics influenced by the imposition of VAT.

Impact on reinsurance transactions

From a reinsurance standpoint, there is the potential for Value Added Tax (VAT) leakage, or even negative leakage, arising from delays in settling accounts with reinsurers. This refers to situations where the timing misalignment between when a primary insurer pays VAT on premiums and when reinsurers reimburse their share of those premiums creates discrepancies. The delay in settling accounts with reinsurers can lead to several challenges.

Recommendations for policyholders in anticipation of vat on non-life insurance premiums

  1. Policyholders can engage or meet with their insurers to understand the operation of VAT and how it will affect their premiums when implemented. They should also inquire if the implementation will have effect on policy coverage especially in the event of claims.
  2. Policyholders should also take into consideration the impact of VAT and explore other alternative coverage that can provide them with the needed value after paying the VAT.
  1. Policyholders should review their existing policies to understand the policy coverage to ensure that there is no repetition of cover which can reduce the cost of premium when VAT is implemented.
  1. The anticipated increase in insurance premiums in 2024 means that policyholders should adjust their budget to take care of this anticipated changes. This will prevent any future cash flow challenges from happening.
  2. Policyholders with additional subsidiaries may explore the option of setting aside funds to safeguard themselves against non-compulsory insurance policies. This involves conducting a thorough analysis of the company’s risk and loss history. Engaging the services of a broker or any insurance professional is advisable in this regard.
  3. Policyholders should also seek clarity on the existence of any refund policies in instances where modifications are made to their insurance coverage or if they opt to switch to a different provider.

Recommendations for insurers in anticipation of vat on non-life insurance premiums

  1. Insurers should always stay connected with regulatory bodies such as National Insurance Commission (NIC), Ghana Revenue Authority (GRA) and others to get up to date information about any news regarding the VAT implementation and compliance to prevent any sanction.
  1. Insurers should assess its current pricing models and modify it to align with the introduction of VAT in order to be competitive.
  2. Insurers should examine and assess the capabilities of its Information Technology system to accommodate any changes required for VAT compliance. If the system is not capable after assessment, the insurer should invest resources to upgrade or modify it system to ensure seamless VAT integration. It should also assess the IT system of intermediaries who have binding authority to issue policy and manage claims on its behalf.
  3. Insurers should educate its staff and intermediaries about the introduction of the VAT system. Training should be conducted to enhance their understanding of the new tax implications and how to communicate these changes effectively to its existing and potential clients.
  4. Insurers should also examine its products offerings to identify any opportunity for product adjustment which can help mitigate the impact of the introduction of the VAT.
  5. Insurers should also collaborate with tax professionals to explore the possibility of any tax optimization strategy that can help reduce the anticipated impact of the VAT on the company’s financial performance.
  6. Examine and review the current refund policy to make adjustment for the introduction of VAT. Refund can be policy cancellation, changes in insurance coverage, suspension of policy and so on.
  7. Insurers should also monitor strategies undertaking by competitors in anticipation of the VAT regime. Key strategy to look out for is pricing adjustment. This can be done by the business intelligent unit or senior managers of the company. Monitor Competitor Responses:

Conclusion

In summary, the implementation of a 21percent Value Added Tax (VAT) on non-life insurance premiums is poised to bring about substantial consequences for policyholders, insurance companies and the overall economy.

Anticipated outcomes include heightened insurance costs, resulting in decreased patronage and diminished profits for insurers, high administrative cost for insurers and increase in competition. The reduced profitability not only affects the financial health of insurance companies but also contributes to a lower sectoral contribution to the Gross Domestic Product (GDP) of the economy. Policyholders and insurers should be proactive in setting up strategies to meet these potential challenged.

>>>the writer is a Chartered Insurance Practitioner (ACII-UK), an accomplished writer and author, and an Associate in Risk Management (ARM) from The Institutes, USA. Additionally, he holds a Master’s in Business Administration degree with a specialization in Finance from the University of Ghana Legon. He has a decade of experience within the Ghanaian insurance industry and currently a manager at Star Assurance Limited. He can be reached via +233249236939 and [email protected] / [email protected]

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