How Will The VAT Increase Affect Your Insurance?

The increase of VAT from 14% to 15% will be felt by all. Every industry will be hit. We take a look at the insurance industry in particular.
Jason Snyman
2018-03-21
We recently had a look at the implications of the 1% VAT increase. Way back in 1991, VAT replaced the GST (General Sales Tax) as an indirect tax. Back then, it was imposed at a rate of 10% - jumping to 14% in 1993. It remained that way for 25 years. With the recent Budget Speech, it was announced by former Minister of Finance and full-time felon, Malusi Gigaba, that we would see an increase of 1%. This would allow the government to raise about R23 billion toward South Africa’s mammoth budget shortfall. Despite protests far and wide against the increase – because why should we all suffer for the government’s abuse and ineptitude – it is still due to commence on 1 April 2018. Despite all the nay-saying, many believe that an increase in VAT may be our only hope at this point. It was unavoidable. Sure, Zuma’s love affair with the Gupta family may be partly to blame. And sure, the poor will be hit harder than the rich. The VAT increase, however, has still been chosen over other options. For too long, we’ve been paying the cost of corruption and state capture. Shouldering the burden of reckless government spending. Coughing up for bloated cabinets and gross incompetence. Now, South African’s will have to tighten their belts even further – there’s no question about it. Every industry in our country will be hit, from telecommunications to retail to tourism. And, of course, the insurance industry, as well. Let’s take a look at the effects.
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1% Equals Massive Impact

The most obvious effect the increase will have on the insurance industry is to the industry itself. Companies, like all others, will have to update their intricate systems, re-train their staff, communicate any changes to their customers, deal with the inevitable backlash and still ensure that everything runs smoothly. All in a very short timeframe. In a recent press release the acting CFO of Lion of Africa Insurance, Yusuf Bodiat, spoke about some of the complications the industry may face. These are questions which will need to be answered.
  1. If an annual policy is already in force, where premiums are collected monthly, is the premium automatically increased? Perhaps not as the contract has already been entered into and the supply was at inception date of the policy?
  2. If a policy is written at 14% and subsequently cancelled (at 15%), how much is the refunded amount? One would think it would be at 14%, but what if there were additions / endorsements to the cover before or after 1 April 2018?
  3. From a reinsurance perspective, there will be potential VAT leakage (or negative leakage) due to the delay in settling accounts with reinsurers?
  4. If a policy is incepted and the cash is received by a broker in March 2018 and paid over to the insured in April 2018 (within 15 days), does the insurer have sufficient information at the end of March to capture the transaction accurately?
  5. Rating engines use the sum insured value to price and accept / reject a risk. If the sum insured were to automatically increase, what would happen to policies which now fall outside the risk appetite of the company? For large risks, would forums / committees need to re-convene to determine if the risk is still appropriate?

How Will The VAT Increase Affect The Customer?

It’s probable that the government has not fully appreciated or considered the massive effect this decision would have. When it comes to the impact on the middle and lower class, they certainly seem to be in denial. All of the aforementioned challenges facing the industry require time, effort and resources. When talking about the entire short term insurance industry, the job is no joke. The above, as mentioned by Bodiat, are just a number of factors that will need to be addressed by the companies. They will need to understand it, firstly, and then amend their systems accordingly. Over time, 15% VAT will become the norm. Business will continue as usual. In the meanwhile, though, companies will be forced to make substantial investments in order to accommodate the changes, and scramble to get everything in place in time. Will the burden of these costs spill over, to be shouldered by the customer? Santam, for one, has announced that monthly short-term insurance premiums collected from 1 April 2018 will include VAT at the amended rate of 15%. For annual policies with cover that commenced before 1 April 2018, Santam will not increase the premium until the next renewal. All claims settled from 1 April 2018 will include VAT at 15%. Santam will not change your fixed excess until the next renewal, but will bear the cost of the impact should your fixed excess be affected by an increase in the VAT rate. Discovery has also announced how the increased of VAT will be implemented. We will be sure to update our readers as more companies announce their plans.

Discovery Announcement

There will be no change to contributions / premiums for Discovery Health Medical Scheme, Discovery Life, Discovery Vitality, Discovery PrimaryCare, and Discovery Gap Cover.
  • Discovery Health Medical Scheme contributions will remain unchanged. The increase in claims cost associated with the VAT increase will be absorbed by the scheme until end December 2018;
  • Discovery Life premiums will remain unchanged;
  • Discovery Vitality, Discovery PrimaryCare and Discovery Gap Cover will absorb the VAT change for 2018. Members and clients will experience no increase;
  • The new VAT rate will be considered as part of all regular year-end review processes.
Discovery Insure premiums, and Discovery Invest and Discovery Card fees will reflect the VAT update from 1 April 2018
  • Discovery Invest fees will be updated on the system from 1 April 2018. While some documentation may still reflect the 14% rate initially, they will be updated to the new rate in due course;
  • Discovery Insure premiums will include the updated VAT rate from April 2018;
  • Discovery Card account fees will also be adjusted from 1 April 2018.