Amendment of Income Tax Law (ITL)
The amending Income Tax Law (ITL), that was published in the Official Gazette, and has been effective since 19th of December of 2019 states that:
“The limit of the allowances provided for in Article 14 of the ITL is increased from one-sixth 1/6th to one-fifth 1/5th of an individual’s taxable income before such allowances. These include contributions to:
· Social Insurance Fund;
· Approved Pension and Provident Funds;
· General Healthcare System;
· Life Insurance Policies;
· Medical and Other Approved Funds” (CIBA, 2019).
The imposition of the above ruling increased the demand for unit-linked life insurance; due to higher incentives of reducing taxable income. Consequently, an increase of 35% approx. was reported in the number of life insurance policies sold, when comparing the reports for the period of January - May in 2019 to 2020. In addition, higher premium was sold due to higher margin of tax benefit allowances.
The ‘invisible hand’ mechanism is a metaphor by the Scottish philosopher Adam Smith, where “beneficial social and economic outcomes may arise from the accumulated self-interest actions of individuals, none of whom intends to bring about such outcomes” (Britannica, 2017:1). Using the above theory, the increase in the incentive and motive of local prospects to buy life insurance policies – due to the change in the regulation of tax rulings – will lead to an increase in demand for unit-linked and life insurance products. This is shown in the below figure, where the demand curve shifts to the right from D1 to D2. This will cause an increase in quantity supplied from Q3 to Q4 and a parallel increase in the premium for life insurance policies from P5 and P6.
From 2019 to 2020, the average annual premium for the policies sold by AN insurance Ltd has increased by €862.24 (€3283.52 - €2421.28 = 862.24). The increase in the average premium per policy was a result of both higher mortality costs and policy fees charged by insurers and higher margin of tax allowances. After the imposition of the new regulation, the agency has gained an additional commission of €388.10 (excluding any override bonus) per new policy sold, assuming an average commission rate of 45%. The higher the premiums of life insurance policies, the higher the commissions received by AN Insurance Ltd. Hence, increased business success. The prospects' increased motive of buying life insurance policies in combination with the higher commission received (due to higher premiums charged by the insurers) indicates that the above company has greatly benefited from the new tax rule.
The extent that the Amendment of Income Tax Law (ITL) could affect the brokerage’s business success during the next years depends on whether most of prospects have taxable income and on whether the brokerage firm specializes in selling life insurance or not.
If the majority of prospects do not have a taxable income, then they would not have an incentive to benefit from the amendment of the rule and therefore, they will be less prone to buy a unit-linked life insurance policy.
The tax rates which are applied to individuals who reside in Cyprus are:
As indicated in the above figure, the individuals whom their annual gross salary is lower or equal than €19,500.00 do not have to pay income tax (PWC, 2020). Therefore, if the majority of prospects have a lower income than €19,500.00, then the demand for life insurance products is not expected to increase significantly and hence, the amendment of the rule would not benefit as much the company’s future success.
In addition, if AN Insurance does not specialize in selling unit-linked/life insurance products, then the overall increase in demand from such products will not be of great benefit. Considering that the amendment of the rule includes only life insurance policies (with maximum benefit) and medical policies (with limitation of 1.5% of annual gross income), it will not benefit firms who specialize in other types of insurances (e.g. general insurance, liabilities etc.).
To sum up, considering that 54.37% of policies that AN Insurance Ltd specializes in selling are life and unit-linked policies, the positive impact that the Amendment of Income Tax Law (ITL) is expected to have for the agency is significant. In addition, the fact that the majority of clients and prospects have a higher income than the threshold of €19,500.00 indicates that there would be an expected increase in demand of life/unit-linked insurance policies and hence, would greatly benefit the agency’s success.
Cyprus International Businesses Association, 2019. Increase of the Limit for Certain Allowances for Individuals from One-Sixth 1/6 to One-Fifth 1/5 – Courtesy of Deloitte [online] Available at: https://ciba-cy.org/increase-of-the-limit-for-certain-allowances-for-individuals-from-one-sixth-1-6-to-one-fifth-1-5-courtesy-of-deloitte/ [Accessed 06 June 2020].
Insurance Association of Cyprus, 2020. Cyprus Laws [online] Available at: http://www.iac.org.cy/easyconsole.cfm/id/243 [Accessed 9 June 2020].
PWC, 2020. Tax Facts & Figures 2020 - Cyprus: The Tax System in Cyprus January 2020 [online] Available at: https://www.pwc.com.cy/en/publications/assets/tff-eng-2020-march-engl.pdf [Accessed 15 June 2020].