Old Mutual insurance warning 

The proposed value-added tax (VAT) increase in the Budget tabled in Parliament will significantly increase the cost of short-term insurance in South Africa, potentially leading some to abandon coverage altogether. 

This, in turn, will exacerbate South Africa’s existing insurance gap, which may force insurers to reduce coverage of certain events and damages. 

Old Mutual Insure managing director Charles Nortje explained that even a small VAT hike of 0.5 percentage points could significantly impact short-term insurance. 

As short-term insurance is subject to VAT, an increase would impact all insurance policyholders, Nortje explained.  

If a policyholder spends R100 on insurance and the VAT portion increases from R15 to R15.50 this year and R16 next year, something has to give. 

Customers may need to choose between reducing cover, increasing excesses or looking for “no frills” alternatives.

Nortje said insurance companies are under pressure to stay relevant, but South Africa’s weak economy and flat GDP growth make it increasingly difficult.  

With consumers struggling to manage rising costs relative to their income, many are questioning whether insurance is even worth it. 

This poses a significant challenge for the industry, as most insurers are grappling with stagnation.

In addition, a VAT change is operationally challenging as it increases the cost of compliance.

It doesn’t add any revenue to insurers, who are burdened with the responsibility of collecting the tax and the complexity of implementing changes to their internal systems. 

The VAT changes will necessitate additional communication to insurance buyers over the next two years, notifying them of the price increase and that the sums insured need to be adjusted.

At the same time, the insurance industry is struggling to manage increases in the average cost of claims due to climate change impacts, growing risk concentrations, and steep inflation on motor repair and building costs. 

Significant premium increases have been seen over the past two years, and while this trend appears to be tapering off, a VAT increase will trigger a fresh round of reviews of insurance policy terms. 

The impact is higher than it appears at first glance – a VAT increase from 15% to 16% represents a 6.7% increase in tax paid. 

While it’s an easy tax to raise and provides immediate revenue collection, it can be an indiscriminate instrument.

Nortje added that this has the potential to increase South Africa’s protection gap, with an increasing share of assets being uninsured and individuals choosing to forego paying premiums to get by. 

In turn, as individuals leave the insurance pool, insurers’ ability to cover catastrophic events is limited. 

This has been exacerbated by the rising number of catastrophic events in South Africa over the past few years, with floods in parts of the country coupled with load-shedding and droughts. 

A pattern has emerged regarding insurers’ responses to a recent series of crises – insurers tend to reduce or withdraw cover, leading to a widening protection gap, Nortje said. 

The Covid-19 pandemic has led to infectious disease exclusions from policies. In South Africa, the power crisis has had a similar effect. Insurers have restricted coverage for power surge-related damage. 

Similarly, several insurers withdrew from California in the USA before the major wildfires that occurred in January this year, given what their predictive models projected. 

This leaves ordinary policyholders struggling to find cover for the risks that concern them most, and further challenges may start to emerge.

Certain areas in South Africa are prone to flooding. Insurers will likely start avoiding high-risk regions like parts of KwaZulu-Natal, effectively leaving homes and businesses without sufficient protection.

As climate risks intensify, such as runaway wildfires, severe storms, and heavy precipitation, insurers’ ability to respond effectively is shrinking. 

Global reinsurers are also reviewing their appetite for these types of risks, making it even harder for South African insurers to offer full cover.

In the 2025 Budget, R1.7 billion was allocated to respond to future disasters over the medium term, while R4 billion was provisionally allocated to address backlogs in recovery efforts for provinces and municipalities. 

The government has also signalled that it is open to public-private partnerships to address uninsurable risks. 

This is a very positive lens through which to view the increase in VAT, which goes toward funding the much-needed building of vulnerable communities’ resilience to disasters.