Insurers & Life: Under cover to under fire

Wealthy individuals boosting their investment returns from high-value insurance policies may be a thing of the past as the finance minister Nirmala Sitharaman proposes to limit the aggregate premium eligible for tax exemptions, but that could squeeze an industry that is still in a nascent stage. From the next fiscal year, returns from life insurance policies beyond an aggregate Rs 5 lakh value will be taxed.

The new rule does not include returns from unit linked insurance plans (ULIPs) and the amount received on death of a person insured via term plans.

Shares of insurers crashed between 8% and 11% as investors believe their growth would slowdown dramatically in a country where insurance has traditionally been used more as a tax-efficient investment vehicle, than as a tool for protection.

“The government is trying to reduce the arbitrage on guaranteed returns on large ticket insurance savings, but it is in contrast to the Insurance Regulatory and Development Authority of India’s (Irdai) objective of insurance for all and could stifle the flow of long-term savings to sectors like infrastructure,” said Joydeep Roy, financial services leader, PwC.
But insurance companies said such large-ticket premiums are not a significant part of their new business so the impact on their revenues and profits should be limited. “For us, it is just 10% to 12% of our new business top line, and it is lesser than that on the bottom line,’’ said Vibha Padalkar, CEO, HDFC Life.

“We will of course change our product mix with the new rules. But, this has come at a nascent stage for the industry and will impact flow of funds to government securities and banks which make up 50% of our investments.”

Padalkar said that Indian retail investors have traditionally chosen income plans over pure term plans because saving for a rainy day was prioritised over protection and this measure could hit appetite for those products. Historically, tax exemption was an important reason that facilitated the deepening of insurance penetration anywhere in the world. And to remove such an enabler in a market where savings products have always had prominence could impact investment, said insurers.

“This is a bit of a dampener for the insurance industry and a blow for increasing penetration of insurance and household financial savings in India,’’ said Tarun Chugh, CEO, Bajaj Allianz Life Insurance.

Chugh pointed out that the household financial savings as a percentage of GDP have fallen from 8.1% in FY20 to 6.5% in FY23 and discontinuing incentives on insurance plans could further squeeze savings.