Insurers raise premiums on new 16pc VAT charges
Insurance companies are re-pricing premiums charged on customers to comply with the new 16 per cent value-added-tax.
What you need to know:
- Insurance companies are re-pricing premiums charged on customers to comply with the new 16 per cent value-added-tax.
- With the raise in premiums, the annual operating costs for most businesses will go up as they incur extra expenses to cover their properties against losses such as fire and theft.
Insurance companies have started re-pricing premiums charged on customers to comply with the new 16 per cent value-added-tax (VAT) introduced via the Finance Act of 2013.
This means annual operating costs for most businesses will go up as they incur extra expenses to cover their properties against losses such as fire and theft.
A leading general insurer has already asked its customers to review the maximum amount that they expect to be paid in case of loss, or what is known as sums insured, as the industry comes to terms with the latest changes.
The insurer wants its customers to align the value of their insured assets such as buildings and stock and the compensation they expect to receive in the event of a loss.
“If there is a gap between the expected amount and the current sums insured, we encourage customers to revise their sums insured accordingly. Such an endorsement will attract additional premium based on the additional sums insured,” reads the letter which was addressed to agents.
This provision became effective on June 26, 2023, defying an outcry from industry players and advisory firms who had argued the move would hurt the attractiveness of insurance in a market whose penetration has remained stuck at under three per cent.
Whereas the law exempts insurance compensation from VAT, as it is not a new sale, the government argues that some businesses, that had already received input tax they paid for an asset or stock, end up receiving a payout that is inclusive of VAT.
“Customers are required to remit VAT on received insurance compensation only if the claim relates to an item where input tax was claimed. This is applicable whether the insurance compensation included VAT or not,” added the letter.
Input tax is the amount of VAT that a business pays on goods and services it purchases for its operations. It can typically be recovered from the government and is, therefore, not a cost to the business.
Mr James Njogu, the head of Group Tax at Britam, an insurance company noted that with these changes, commercial businesses are likely to pay more premiums as insurance companies move to shield themselves against the extra tax liability.
“With the Act coming into place, now the value of the building you need to mark it up with VAT cover rate, then they (insurers) will charge an appropriate premium. Then in case of an event of fire or anything, when you are compensated it is also inclusive of VAT,” said Mr Njogu.
Before the changes in law, insurance would cover the asset without factoring in the VAT element, added Mr Njogu.
“The premiums will go up because they (insurers) need to compensate for the increased value of VAT,” he noted.
Mr Njogu explained that commercial businesses, which claim VAT input, will be hit the hardest.
By the end of 2022, the insurance industry received premiums amounting to Sh96 billion, data from the insurance regulator shows.
