Insurers brace for cost shock from input tax credit loss

Lower taxes on insurance policies have been a long-standing demand of the insurance sector, with the industry favouring a cut from 18% to 5% rather than a complete exemption.

The GST exemption on individual protection and health policies will, however, directly benefit consumers by reducing costs for insurance products.

Industry experts believe that in a country where insurance under-penetrated and medical costs are rising rapidly and significantly, this will both nudge new customers to come under the insurance fold and encourage existing policyholders to enhance their coverage within the same budget.

“Even if there is a 3–8% impact due to ITC (input tax credit) loss, depending on the volume of retail health business each company does, the net benefit to policyholders remains very significant,” Tapan Singhel, managing director and chief executive officer, Bajaj Allianz General Insurance said, adding that if hospitals also pass on their GST relief, claim costs will come down significantly for consumers.

Consumers will benefit from lower premiums on individual protection plans, unit-linked insurance plans (ULIPs), endowment and traditional policies, including family floater and senior citizen plans. However, insurers are unlikely to pass on the entire 18% relief, especially for ULIPs, where the investment component limits the tax impact.

“The exemption blocks insurers from claiming input tax credits, which means consumers will see meaningful relief, but not the full 18% on day one,” said Gaurav Gupta, CEO of CarePay.

Higher costs for insurers

While insurers might incur higher costs for inputs like IT services, rentals, and professional fees as they will need to bear the GST on such inputs as a cost, overall expenses are likely to be capped due to the 30% expenses of management (EoM) limit imposed by Insurance Regulatory and Development Authority of India (Irdai). This may curb insurers’ ability to absorb all the additional costs.

While market competition will prevent insurers from arbitrarily increasing premiums, in the medium to long term, as pricing cycles are revisited, insurers may make marginal adjustments to base premiums to account for the ITC loss, said Narendra Bharindwal, president, Insurance Brokers Association of India, pegging the overall impact from loss of input tax credit is expected to be around 3-4%.

Macquarie Capital said in a note that insurers will have to decide how much hit they can absorb and how much they can pass on to their distribution partners and customers.

It believes that amid muted growth, insurance companies are unlikely to raise base prices immediately and instead absorb the impact. This includes motor insurance where the insured declared value and premiums are expected to fall due to the lower cost of vehicles, even as the claims experience is likely to remain the same.

Samir Shah, executive director and chief financial officer, HDFC ERGO General Insurance Company said while premiums are expected to reduce due to lowering of the taxes, “we are yet to understand the extent of this reduction as this will also depend upon availability of the input tax credit, which will become clearer over the coming days.”

Regulatory bodies need to reassess how some enabling mechanisms can be established for insurers to achieve sustainable returns, or else the entire premise of increasing insurance penetration will be undermined, said Pallavi Malani, managing director & partner and leader of insurance practice for BCG India.

“In the short run, we might see insurance numbers falling due to free-look cancellations by customers to avail the reduced price. We need to be cognizant of that. Insurers will also need to make move quickly to drive customer education and capitalize on this momentum to drive up sales which will help in the longer run,” she added.

Long-term benefits

Industry leaders remain positive about the structural impact. “The move may lead to some rebalancing in product preferences — particularly between individual term plans and group credit life, the long-term impact will be positive,” said Rushabh Gandhi, managing director and chief executive officer, IndiaFirst Life Insurance.

“The onus is now on the industry to become more efficient, leverage technology, and negotiate better across the value chain so that the maximum benefit is passed on to customers,” Bajaj Allianz General’s Singhel said.