Car insurers have raised the alarm over a potential mass migration of Kenyan motorists to third-party insurance if the National Assembly approves the proposed motor vehicle tax in the Finance Bill, 2024.
In a press statement released Friday, the Association of Kenya Insurers (AKI) urged lawmakers to reject the proposed tax, pointing to its detrimental impact on the insurance industry and motorists alike.
Third-party insurance, which only covers damages to other parties in the event of an accident, would become the go-to option for many, AKI predicts. This type of insurance provides protection against physical injuries, vehicle damage, property damage, and death caused by the insured vehicle. However, it does not offer any compensation if the accident is caused by drunken driving.
The Finance Bill, 2024, introduces a motor vehicle tax set at 2.5 per cent of the vehicle’s value, with a cap of Ksh100,000.
Tom Gichuhi, the Executive Director of AKI, explained that this new tax would significantly increase motor insurance costs. The current comprehensive insurance premium rate averages at 5 per cent, and with the additional 2.5 per cent, the total premium rate would rise to 7.5 per cent.
“With motor vehicle insurance being compulsory in Kenya, we anticipate a major shift towards third-party motor insurance if this tax is implemented. Consequently, motorists will face higher risks, as they will essentially only be covered for third-party liabilities, leaving their own vehicles unprotected in the event of accidents. This could burden motorists with significant out-of-pocket expenses for repairs or replacements,” Gichuhi stated.
Insurers also warned that a shift to third-party coverage would reduce their income, which would in turn lower corporate tax contributions. Additionally, a decline in insurance income could lead to workforce downsizing, further reducing employee tax revenues for the government.
“While we acknowledge the necessity of expanding our tax revenue to meet the demands of a growing economy, we advocate for a focus on creating an environment conducive to business growth. By doing so, increased tax collection can be achieved substantially and more sustainably. This necessitates ongoing collaboration with all stakeholders to ensure the creation of a robust and thriving business ecosystem,” noted Gichuhi.
Kuria Kimani, MP for Molo Constituency and chair of the National Assembly Finance Committee, stirred controversy earlier this week by defending the government's proposal to levy car owners through the motor vehicle tax. “If you go to economies ahead of us, there are elaborate and very efficient public transport systems,” Kimani told NTV in an interview.
He added, “Every time investors want to invest in our public transport system through public-private partnerships, the feasibility studies show that we like to drive our cars so much that we are not able to attract foreign investment.”
He argued that Kenyans prefer using cars because the public transport system is not “elaborate” enough and suggested that with a better alternative, they would avoid using cars.
AKI has joined a growing chorus of opposition against the motor vehicle tax. “We implore the National Assembly to reconsider the proposed motor vehicle tax, as its implementation would have far-reaching adverse effects on both the insurance industry and the economy at large. As the representative body of the insurance sector, we stand prepared to engage continuously with all stakeholders to cultivate a sustainable business environment,” AIK stated.
