Ontario’s harmonization of sales tax with GST predicted to drive up insurers’ claims costs

Ontario’s harmonization of the provincial sales tax with the GST will definitely drive up claims costs for property and casualty insurers, an audience attending the 2009 IBC Financial Affairs Symposium in Toronto heard.
“There is going to be a definite impact on costs [to property and casualty insurers] both on an operating level and, on a broader basis, claims,” said speaker Danny Cisterna, a partner at Deloitte & Touche LLP. “For sure, your claims costs are going to go up.”
Cisterna said his firm is currently crunching numbers to estimate the financial impact to insurers.
Although financial services will be exempt from the proposed new Ontario Harmonized Sales Tax (OHST), Ontario intends to maintain beyond June 2010 the 8% Retail Sales Tax (RST) on group insurance and certain property and casualty insurance, Cisterna said.
RST currently applies to many purchases businesses make in the course of providing goods and services for sale. It is embedded in the price of the goods and services throughout the supply chain and eventually passed on to consumers.
Cisterna said property and casualty insurers now incurring costs currently not subject to the RST but subject to the 5% GST can expect to see increased fees for services as a result of the harmonized tax.
For example, insurers might see increased bills for fees paid for legal, accounting and other professional services, as well as for real property contracts including leasing, towing and storage.
He predicted the effective use of “net of GST” claims settlements will become more valuable in the future.
One questioner asked if it wouldn’t be a good idea for insurers to try and leverage reduced rates from suppliers that are exempt from paying the OHST.