In any case, insurers will have to absorb a large portion of liability
Considering the large number of insurance policies - especially on motor - sold to individual retail customers, it would be practically impossible for insurers to reach out to hundreds of thousands of retail customers to recover the applicable VAT.
The tax liability of UAE insurers for 2018 following the implementation of five per cent value added tax will be huge in the range of Dh700 to Dh800 million, a new analysis forecasts.
According to international ratings agency S&P, UAE insurers are obliged to deposit tax liability whether they can recover this amount from their customers or not.
"The tax liability for the total market is large: we estimate that it ranges between Dh700 million to Dh800 million based on estimated gross premiums [general insurance] of more than Dh30 billion for 2017," said Sachin Sahni, primary credit analyst at S&P, in a report highlighting the operating challenges for the insurers.
Barring life insurance segment, the UAE implemented five per cent VAT on insurance products from January 1, 2018. Saudi Arabia was the other country to levy VAT as part of the GCC framework.
Ghulam Teli, an independent insurance industry analyst, had told Khaleej Times that the insurance industry will grow in 2018 on the back of the recovery in oil prices and growth in the overall economy.
"VAT will hurt the operating profits of almost all insurers in the UAE," the S&P analyst said, adding that the general insurers will have to closely monitor their loss ratios in 2018, as not all VAT paid on claims suppliers' invoices may be recoverable.
"While we expect that insurers might be able to recover a portion of this amount, in any case insurers will have to absorb a large portion of this tax liability in 2018, which could weaken the performance of some insurers and the overall market's profitability."
Considering the large number of insurance policies - especially on motor - sold to individual retail customers, it would be practically impossible for insurers to reach out to hundreds of thousands of retail customers to recover the applicable VAT, Sahni said in the six-page note.
Even if insurers decide to reach out to all of their clients, most insurance policies sold in 2017 did not include any clause for a retroactive claim on VAT, with the exception of the few insurers who started inserting this clause during the latter part of 2017, it said.
According to the S&P research report, general insurers in the UAE also need to be prepared for another VAT challenge in 2018.
With respect to claims, whether for policies were written in 2017 or 2018, suppliers' invoices raised in 2018 would include VAT.
"While the general understanding is that insurers would be able to claim this amount as input tax, this is only applicable when the claim invoice is raised in the insurer's name. If the suppliers raise invoices in the name of the insured and not the insurance companies, then insurers won't be able to recover the amount paid for VAT as input tax," said the S&P report.