Insurance firms raise premiums on new VAT charges
- Published By The Statesman For The Statesman Digital
- 10 months ago
Insurance firms have started repricing the premiums charged on customers as they complied with the new 16 percent Value-Added-Tax(VAT) introduced through the Finance Act of 2023.
This means that the annual operating costs for most businesses are likely to go up, as most of them incur additional premiums to insure their properties against such losses as fire and theft.
A leading general insurer has 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 new 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 the 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 percent.
Whereas the law exempts insurance compensation from VAT, the national 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 the goods and services it purchases for its business operations. Input tax can typically be recovered from the government and is therefore not a cost to the business.
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 additional 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 Njogu.
Before the changes in law, insurance would insure the asset without factoring in the VAT element, added Njogu.
“The premiums will go up because they (insurers) need to compensate for increased value of VAT,”he added.
Mr Njogu explained that commercial businesses, which claim VAT input, will be hit the hardest.
General Insurance classes such as marine, domestic and industrial fire, private motor vehicle, aviation and workmen’s compensation from which the insurance industry will be affected by the latest changes.
By the end of 2022, the insurance industry received premiums amounting to Sh96 billion, data from the insurance regulator shows.
A big chunk of claims, amounting to Sh37.3 billion, were on private and public motor vehicle insurance.
Before the changes the KRA had lost several cases, the most popular being KRA losing a case in which it was seeking Sh380.3 million in taxes from Sony on a Sh4.4 billion payout that Kenindia Assurance Company remitted to Westgate in 2014 as compensation.
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