South Africans warned that they will pay more for insurance

The local insurance industry is under severe pressure from upcoming tax hikes and geopolitical uncertainty, and South African policyholders are likely to bear the brunt of the impact.

Consult by Momentum’s franchise development manager, Matthew Gezane, recently outlined why South Africa’s short-term insurance industry is facing increased pressure and how this could affect the broader insurance industry.

He explained that this pressure is coming from two directions – proposed domestic tax hikes and global trade uncertainty. 

“Taken together, these developments are likely to deepen financial strain on policyholders while simultaneously threatening the growth and stability of the insurance sector itself,” he warned.

The tax hikes follow Finance Minister Enoch Godongwana’s proposal for a value-added tax (VAT) increase in the 2025 Budget.

While it remains uncertain whether this VAT hike will remain in place, South African households and businesses are likely to pay a higher rate starting next month.

From 1 May, the VAT rate will increase from 15% to 15.5% in 2025 and then to 16% in 2026, which Gezane said will directly affect the cost of financial services, including short-term insurance. 

He said insurers have begun notifying policyholders of increases, given that VAT is a compliance requirement and, therefore, does not provide these insurers with additional revenue. 

Gezane pointed out that these higher premiums for policyholders come at a time when South African households are already under pressure from sub-inflationary wage growth and rising living costs.

The VAT hike will, therefore, place significant pressure on local households and businesses.

Gezane said local businesses face an even more complex situation, as they must manage this VAT increase and a more uncertain global trade environment.

Earlier this year, the United States announced a 31% tariff on South African exports. Although this has been paused for 90 days, a 10% flat-rate tariff on products imported into the United States remains in effect. 

“These tariffs erode the benefits previously enjoyed under the African Growth and Opportunity Act (AGOA), making South African goods less competitive in the US market,” Gezane explained.

“Businesses are now facing tough choices: absorb the cost, raise prices or cut expenses somewhere.”

Insurance industry in trouble

Gezane explained that short-term insurance is often viewed as a grudge purchase. In other words, it is important to have, but ultimately expendable when budgets are tight. 

“This places insurance in the firing line when businesses look for ways to reduce overheads and protect profit margins,” he said. “The consequences are likely to ripple through the broader insurance industry.”

This is because short-term insurers rely on robust economic activity, especially in manufacturing and exports, to drive premium growth and policy retention.

Therefore, a slowdown in production or the withdrawal of South African businesses from international markets could lead to reduced cover levels, cancelled policies or increased claims volatility.

Gezane warned that, at a macro level, this contributes to a broader economic dilemma, which stems from the fact that South Africa is a small, open, consumption-led economy. 

In other words, South Africa imports more than it exports, which leaves the country with a trade deficit. 

“When exports decline – either due to punitive tariffs or declining competitiveness – our balance of payments weakens further, adding to the fragility of the rand and dampening investor confidence,” he explained.

“The net effect for insurers is a shrinking pool of insurable economic activity, heightened policyholder risk and pressure on margins.” 

“For policyholders, it means navigating a shifting landscape where prices rise, coverage narrows, and the fine print becomes ever more important.”

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

For example, 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.

Therefore, the VAT hike could potentially lead some to abandon coverage altogether, which would not only leave those consumers unprotected but also exacerbate South Africa’s existing insurance gap.

Nortje warned that this may force insurers to reduce coverage of certain events and damages.