Complemented by a robust macroeconomic environment, aggressive reforms to the policy framework, a rising per capita income and savings, this hunger could propel the industry into the top insurance markets globally. As the insurance sector prepares itself for faster growth, Budget 2023 could prove to be a catalyst for its reformation. (Tax breaks, jobs or plan to beat China: What will Budget 2023 offer? Click to know)
India is a young country; majority of its population falls between the working age group of 18 and 60 years. As per the economic survey, its per capita net national income has been on the rise, increasing from Rs. 265 in FY 1951 to ~ Rs. 1,50,326 in FY 2022. India’s savings rate has also ballooned from a record low of 7.9% in 1954 to a 28.2% in 2021.
With the Indian customer maturing and their outlook on financial planning undergoing a steady change, the Indian government will focus on mobilizing savings into productive avenues, offering sustained employment opportunity and supporting long-term capital formation through the insurance sector.
India’s global aspirations also could be aided by the growth of the insurance sector and prove monumental in displacing China as the more lucrative investment opportunity. China’s declining population, deteriorating private sector dynamism, and growing isolation at an international stage could give India a competitive edge. Coupled with this, India’s absolute focus on ease of doing business could improve the country’s prospects as the leading Asian economy.
Progressive reforms to open up the distribution architecture:
The government has already proposed multiple reforms as a part of the Insurance Laws (Amendment) Bill 2022. Among the key changes is allowing ‘One License for All.’ A composite license will allow insurers to offer all insurance requirements under a single entity, paving the way for a recurring industry demand. The bill proposes several more changes like removal of the Rs. 100 Cr minimum paid-up capital requirement for carrying out life, general, or health insurance businesses. Taking all these factors into consideration, here are some key expectations from the upcoming Budget 2023:Making insurance affordable through tax incentives
Life insurance investments are long-term investments, unlike other investment avenues that are covered in 80C that have much shorter investment horizons. Currently, everything is clubbed under the same IT deduction section (80C) capped at INR 1,50,000. We expect the budget to consider creating a separate section for tax deduction on premium paid towards life insurance. This would enable a more logical segregation of investor’s funds into long-term and short-term kitties.
Insurance buyers could also be rewarded with a lower GST rate. An existing rate of 18% dents affordability whereas a five percent slab-rate may help promote insurance as a necessity. A lower tax rate and rewards on buying insurance of any kind would only prompt people to consider insurance on an equal footing as saving.
The burgeoning annuity opportunity
While there is a lot of enthusiasm around our young demographics and the resultant demographic dividend, there also needs to be acknowledgment of the fact that with 138 million people above the age of 60, we are also home to the second largest elderly population in the world. This number is likely to increase to 194 million in 2031, as per a study by National Statistical Office. Add to this the fact that the average life expectancy in India has increased 3.5 years every decade over the last 3 decades.
This vast ageing population underlines the burgeoning pension and annuity market in India. Annuity caters to the key dilemma of a pensioner, for a life-long pension at a steady, guaranteed rate and exposes the investors to a reinvestment rate risk especially in a volatile interest rate scenario. Annuities are the only solution, which provide complete protection from the perspective of living longer (i.e. outliving one’s corpus), by providing a regular flow of income throughout one’s lifetime, purchased in lieu of a single lump-sum amount.
Hence, a tax break on annuity could become a game changer. Currently, an annuity is completely taxed in the hands of the customer, which blemishes the product’s allure. Also, the tax benefit of Rs. 50,000 offered on NPS under Section 80CCD (1b), which is over and above the Rs. 1,50,000-lakh limit of 80C, should be extended to Annuities.
In addition, the Government should enable companies to issue longer-dated bonds for institutional investors (primarily annuity providers) for managing interest rate risk for longer duration projects. Further this will help insurance companies to channelize long-term saving into capital intensive sectors.
Insurance as a lever of sustainable growth:
India’s infrastructure sector is struggling as the traditional financiers, with their shorter-term sources of funding, are reluctant to extend loans lest it skew their asset-liability balance. Life insurance companies with their long-term assets can help spur the country’s infrastructure sector, and consequently, its GDP growth. The government should consider this aspect as well, for incentivizing investments into Life Insurance products that will facilitate infrastructure and overall development of the country.
As the Finance Minister rises on February 1 to unveil Budget 2023, the sector will await progressive reforms with a bated breath.
(The author is an executive director at Edelweiss Tokio Life Insurance)
