9 - 15 December 1999

Insurance sector laments exclusion from welfare reform committee

by Anthony Manduca

The Life Assurance Sector has lamented the fact that it has not been asked by the government to form part of the Social Welfare Reform Committee even though this had been promised in the 1999 budget. This was made clear in the reactions to the latest budget by the Association of Insurance Agents. The Social Welfare Reform Committee was set up by the government to propose ways of solving the welfare gap as well as to suggest ways of modernising the country's welfare system. It includes representatives of both the government and the public sector. Considering that one of the committee's main proposals could well include incentives for private pensions schemes, it seems odd that nobody from this sector was appointed to the committee. The association also said that the government had failed to make any suggestions in the budget to solve the welfare gap.

In its reaction to the budget the Association of Insurance Agents praised the government's policy aimed at reducing the budget deficit. However, it said that the depression in the economic sector has had an adverse effect on the insurance industry - a situation which is likely to persist in the short term. The induced costs from Budget 2000 is therefore expected to have an overall negative effect on insurance business, it said.

The association said that the latest available figures show stagnant premium growth with worsened loss ratio for most general classes of business as a result of a persistent increased claims costs. With such depressed margins the industry will be unable to control cost pressures and is therefore concerned on the negative impact which additional hospitalisation costs could have on technical results. This scenario is aggravated by the increased cut throat competition in recent years.

Insurance operational costs will also suffer from substantial VAT increases on communication and transport costs, and from their negative effect on other expenses, VAT on petrol and telecommunications would not be neutral on insurance business and would therefore have an additional effect on the cost of goods and services to the industry. Such an increase will almost certainly lead to an inflationary effect on insurance costs.

The Budget has once more failed to remedy the distortive effect which the minimum duty of Lm5 has on low cost insurance policies. This obviously discourages demand and this hardship has already been partially corrected and it is expected that other short-term covers such as travel policies, will now receive a similar tax treatment.

The Association is equally disappointed that Budget 2000 has once more fallen short of coming to grips with pension restructuring. It said the government has missed another opportunity to reduce what is clearly an unsustainable burden on the country's finances, again failing to introduce private pensions and to give tax incentives that encourage individuals to take responsibility for their future.

The association reiterates that government should not abdicate its duty and should therefore continue to provide a first tier pension scheme as a safety net. Any change should be introduced gradually and based on the fundamental principle of social solidarity.

On a more positive note are the measures which would allow insurers to maximise investment returns on policy holders funds through exchange control liberalisation, and the direction embarked by government to boost financial services including the potential business interest that Malta could gain through becoming a centre for e-commerce.

Also welcomed is the tax (document duty) exemption on medical insurance. This is a measure which will remove a disincentive to those who pay for their own medical health care, and will therefore shift some of the burden of Health Care away from public finances. However the association is concerned when government proposes a change in the contractual relationship between health insurers and their clients.