THE PHILIPPINE NON-LIFE INSURANCE INDUSTRY
STUDY- Non-Life Insurance Tax Reform
The Philippine economy grew 7.2% in 2013, and reach an annual income of $2,790 per capita. The growth performers were financial services, construction, manufacturing, and real estate & business services. The key growth drivers were consumer spending, overseas Filipino remittances, and business process outsourcing.
Non-life insurance premiums grew at 8% a year and reached P41 billion in 2011. The premium was growing slower than GDP and services, the penetration has fallen to 0.4%, which is among the lowest in ASEAN.
Motor and fire insurance lines account for 63% of non-life insurance premiums. Recent years saw emerging sub-lines like motorcycles and the earthquake, typhoon, and flood coverage.
The Philippine non-life insurance market consists of many small local companies, and mostly with no regional presence. The fragmented market exerts pressure on companies to bring down premiums and disregard risk management.
ASEAN economies are young developing markets with low non-life insurance penetration rates- big opportunities from demographics and financial development trends. The Philippines has relatively high non-life insurance taxes and ranked in the lower half among ASEAN countries.
The Philippines is a developing country that is vulnerable to calamities brought about by earthquakes, typhoons, and volcanic eruptions. It will be very helpful for households and businesses to have insurance policies for assistance, security, and faster recovery from losses due to natural disasters.
A 1% in insurance penetration may lead to 13% reduction in uninsured losses and 22% reduction in taxpayer contribution following a disaster.
The present non-life insurance taxes add up to a high 24.5% of the premium. It is not uniform with life insurance, considerably higher than those in the ASEAN, and even approaches the sin tax levels.
The non-life insurance industry, through PIRA, proposes for a reduction in tax rates for non-life insurance products:
- Replace present 12% VAT with 2% premium tax
- Replace present 12.5% DST with graduated taxes- up to PhP100 for premiums exceeding PhP1 Million-or maximum of 0.01% DST.
The proposed reduction in taxes on premiums will be recouped eventually through higher premium income resulting from more affordable insurance premiums and higher demand for non-life insurance products.
There is an added advantage of higher insurance penetration rates and therefore increased readiness and resilience on the part of the population and lower tax burden on the part of the government in times of disasters.
Elements of non-life insurance tax reform
- Non-life insurance taxes must be uniform and equitable with life insurance taxes
- Replace 12% VAT with 2% premium tax
- Minimize DST, graduated up to PhP100 per PhP1M
- Non-life insurance taxes must be lower than equivalent taxes in the other ASEAN
- Non-life insurance taxes must be affordable to buyers of insurance products in local market.
- An affordable catastrophe insurance is essential for countries that are vulnerable to natural disasters, which will result in lower rehabilitation cost for the government in the event of catastrophes.
The proposed reductions in tax rates will make non-life insurance taxes uniform and equitable with life insurance taxes, more competitive with non-life insurance taxes rates in the ASEAN and consistent with the needs of the economy.