South African Insurance Premiums Set to Increase Due to Tax Hikes and Global Challenges

South African policyholders are bracing for an increase in their insurance premiums as the local insurance industry grapples with tax hikes and global trade uncertainties. The latest developments highlight the strain on the short-term insurance sector, which could have lasting effects on both businesses and households in South Africa.

Tax Hikes and Their Impact on Short-Term Insurance

The pressure on South African policyholders stems from two significant developments: proposed domestic tax hikes and global trade uncertainty. According to Matthew Gezane, franchise development manager at Consult by Momentum, these factors combined will increase the financial strain on households while threatening the stability of the insurance industry itself.

As announced in the 2025 Budget by Finance Minister Enoch Godongwana, the Value-Added Tax (VAT) rate will rise in two phases—from 15% to 15.5% in May 2025 and 16% in 2026. This increase is expected to directly impact the cost of financial services, including short-term insurance. While the VAT hike may not provide insurers with additional revenue, it will inevitably lead to higher premiums for policyholders.

The rise in insurance premiums comes at a time when South African households are already feeling the effects of sub-inflationary wage growth and rising living costs. Businesses, on the other hand, face an even more complex challenge, as they must navigate both the VAT increase and an uncertain global trade environment.

Global Trade Tariffs Exacerbate the Situation

Earlier this year, the United States imposed a 31% tariff on South African exports, a move that has been paused for 90 days. However, a 10% flat-rate tariff remains in effect for products imported into the United States. This situation erodes the advantages previously offered under the African Growth and Opportunity Act (AGOA), which helped make South African goods more competitive in U.S. markets.

Businesses now face difficult choices: absorb the cost of tariffs, raise prices, or reduce expenses. Unfortunately, insurance is often seen as a “grudge purchase”—something essential but expendable when businesses need to tighten their belts. As a result, the insurance sector is likely to experience reduced premium growth, policy cancellations, and increased claims volatility.

The Future of the Insurance Industry

Gezane warns that the slowdown in production and the withdrawal of South African businesses from international markets could further pressure the insurance industry. Short-term insurers rely on economic activity, particularly in manufacturing and exports, to drive premium growth. A decline in exports or a reduction in business activity would shrink the pool of insurable economic activity, leading to higher risks and tighter margins for insurers.

The broader economic impact is also significant. South Africa’s consumption-driven economy means that the country imports more than it exports, creating a trade deficit. When exports decline, the balance of payments weakens, which can lead to a fragile rand and decreased investor confidence. For insurers, this results in a shrinking market and increased challenges in maintaining profitability.

What This Means for Policyholders

As South Africa navigates this shifting economic landscape, policyholders will feel the pinch. Rising prices, narrowing coverage options, and increasing fine print will force many to reconsider their insurance needs. In some cases, policyholders may opt to reduce their coverage, increase excesses, or explore cheaper, no-frills insurance alternatives.

The VAT hike, in particular, could lead some consumers to forgo insurance coverage altogether, exacerbating South Africa’s existing insurance gap. According to Charles Nortje, managing director of Old Mutual Insure, even a small increase in VAT can have a significant impact on short-term insurance. For example, a R100 policy could see a VAT increase from R15 to R16, leading policyholders to adjust their coverage or potentially abandon insurance entirely.

As South Africa’s insurance industry faces mounting pressure from both domestic tax hikes and international trade challenges, policyholders are likely to bear the brunt of these changes. The increased costs of insurance premiums, combined with the strain on household budgets and businesses, highlight the need for careful planning and adaptability in the face of economic uncertainty. Both insurers and policyholders will need to navigate this evolving landscape as the future of South African insurance remains uncertain.

{Source: Daily Investor}

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