Cantillon: Borrowed time runnning out for insurers

It was something no one wanted to hear and so everyone stuck their heads in the sand. The unwelcome news was a judgment from the European Court of Justice that insurance companies outsourcing parts of their business – such as handling claims and other back-office functions – must pay VAT on the value of that work.

Because insurance companies and brokers are exempt from VAT, the understanding was that functions they delegated to others, such as claims handlers, were also exempt. That understanding is backed by Irish law.

Irish insurers have, with UK colleagues, been among the most active in outsourcing such non-core activities. To make matters worse, as VAT-exempt businesses, they will not be able to claim back the millions of euro in VAT that could be passed on by claims handlers under this ruling.

When it all trickles through the system, it means customers will be ones paying the extra bill – on top of a €90 million hit on premiums from the recent Setanta Insurance court ruling. And this at a time when claims costs and premiums are rising. You can see why it’s unwelcome.

"There are a lot of people in this town hoping it will all go away," one industry insider told Cantillon. "The big question is whether Revenue can get away with not enforcing it," said another.

And that gets to the nub of the issue. The ECJ judgment makes reform almost inevitable – not least because it reinforces a decision made by the same court in another case in 2005.

That judgment was not implemented as the countries affected hoped an EU review of VAT rules for financial services, including insurance, would prompt a rethink. However, that review has collapsed and now this case copperfastens the 2005 judgment.

Approached for comment this week, a full 11 years after the original judgment that put the industry on notice of the need for change, the umbrella group for the Irish insurance sector, Insurance Ireland, was unable to comment on the implications for the sector. It could not even say how many of its members outsourced such work or the financial scale of it.

With risk management a central tenet of the insurance business, you would think they would have been a little bit more prepared than that.