Insurance Costs Set to Rise Due to South Africa’s Planned VAT Increase

South Africa’s proposed VAT increase to 16% will substantially affect the insurance industry, raising costs for policyholders. Insurers are grappling with economic challenges, rising claim costs, and a growing protection gap due to coverage reductions. The government has allocated funds to disaster recovery efforts and is open to public-private partnerships to address uninsurable risks, presenting an opportunity for collaboration to enhance community resilience.

As South Africa contemplates a VAT increase from 15% to 16%, scheduled in two increments, the insurance sector braces for a likely surge in costs. This adjustment will directly influence all policyholders as their insurance expenses are expected to rise. Specifically, for a policy costing R100, the VAT portion will increase from R15 to R15.50 in the current financial year and finally to R16 next year. In response, consumers may face the necessity of adjusting their coverage or seeking alternatives with lower costs.

Moreover, the insurance market faces challenges amid an already struggling economy characterized by flat GDP growth. Many consumers are reconsidering their insurance needs due to increasing financial pressures, leading to stagnation in the industry. As the burden of collecting VAT falls on insurers, they must navigate compliance complexities that do not contribute extra revenue, further straining their operations.

The VAT changes call for additional efforts in communication to policyholders, as they will need to be informed about price adjustments and coverage alterations over the next two years. As premium increases resulted from a combination of rising claims costs, climate change, and inflation, any VAT hike will inevitably prompt reevaluations of various insurance policy terms.

Importantly, recent trends indicate that insurers are transferring risks by limiting coverage options, resulting in a widening protection gap. The COVID-19 pandemic prompted many insurers to exclude infectious disease coverage, and similar restrictions have arisen due to South Africa’s ongoing power crisis. As more insurers retreat from high-risk areas, ordinary policyholders may struggle to secure adequate coverage against prevalent threats, particularly those posed by climate change.

The government has allocated R1.7 billion to mitigate future disasters and an additional R4 billion to support recovery efforts at municipal levels. Encouragingly, the government has expressed willingness to explore public-private partnerships to tackle uninsurable risks. This outlook presents an opportunity for the insurance industry to collaborate with the government in enhancing community resilience against disasters, while developments such as the VAT increase may help fund these essential initiatives.

In light of the proposed VAT increase in South Africa, the insurance industry faces significant financial implications, necessitating adjustments from both insurers and policyholders. The economic challenges and increasing operational complexities compound the need for effective communication regarding policy adjustments, as consumers grapple with financial constraints. The widening protection gap highlights the pressing need for comprehensive coverage options. Collaboration between the government and the insurance sector remains crucial in enhancing resilience against future disasters.

Original Source: www.zawya.com