India is witnessing an increase in the insurance penetration and it is poised to grow rapidly driven by awareness and the emerging challenges in terms of an individual’s life, including health and financial security of the dependents.
After Covid-19, the awareness about the need for health and life insurance has further gone up.
Growing middle class and the rising digital penetration will result in the market size reaching $222 billion by FY26, consultancy firm Redseer said in a report released last year.
According to the data available on the official website of Invest India, the Indian insurance market stands at $131 billion as of FY22. The industry grew at a CAGR of 17% over the last two decades. India is ranked 11th in global insurance business.
As the Union Budget 2023 will capture different sectors of the economy, insurance experts also seek some measures to be focussed on the industry.
Reduction in GST on health insurance products, deduction limits under different sections of the income tax are some of the demands that experts feel will make products affordable and increase the adoption of insurance in the country.
Krishnan Ramachandran, MD and CEO, Niva Bupa Health Insurance, said, “Rising medical inflation has resulted in many insurers increasing the premium on health insurance products this year. To reduce the premium cost and make health insurance purchase more affordable for policy buyers, insurers have been requesting the government to reduce the current 18% GST rate from health insurance products.”
The government should consider lowering the prevailing GST rate on health insurance. This will enhance its penetration by making health insurance plans more affordable. Subsequently, increasing the limit to claim tax deductions under section 80D will enhance affordability and encourage more people to opt for health insurance for their family and elderly parents.
The Covid pandemic experience and increasing hospitalisation expense is leading people to consider higher sum insured health insurance plans which provides comprehensive coverage against all diseases. “The limit increase under section 80D will encourage them to opt for a health insurance plan with adequate sum insured to secure the health of their loved ones,” Ramachandran added.
Some experts feel that life insurance and annuity products need encouragement in reducing dependency on the government.
Conjeevaram Baradhwaj, executive vice president (legal & compliance) & company secretary at Future Generali India Life Insurance Company, said, “While Prime Minister’s Jeevan Jyoti Bima Yojana plays a big role in promoting life insurance penetration in the country, in view of the limitation of life insurance cover of Rs.2 lakhs, under the scheme, fiscal encouragement by way of income tax benefits helps sustaining a reasonable life insurance cover to support the family. Life insurance (which covers the mortality risk) and annuities (which help manage the risk of living longer) need to be encouraged as key risk management tools for self-sustenance and reducing dependency on State.”
Baradhwaj also underlined that in India, penetration of the life insurance sector has gone up marginally from 2.15 per cent in 2001-02 to 3.2 per cent in 2021-22. When compared to countries like Italy, France, South Korea, South Africa and UK, the life insurance penetration in India is low mainly because of the low life insurance literacy levels in India.
Experts also highlighted that pension needs to be encouraged in the country to achieve a secure retirement planning for the masses.
Sonali Athalye, chief financial officer, Aviva India, added that looking at the numbers, pension is still untapped low-hanging fruit. “We, as an industry, expect the government to focus on it and achieve retirement planning for the masses, long-term infra funding, and employment generation. Simple measures like taxation parity between commuted and uncommuted pension options, as well as the same tax treatment for NPS and other pension schemes, can do the magic,” Athalye said.
Pointing out various sections of the Income Tax Act, 1961 for deductions, Baradhwaj elaborated that even though Section 80C of Act provides deduction for life insurance premia, the limit of deduction up to Rs.1,50,000 includes other eligible savings under Section 80C, 80CCC & 80CCD, leaving little/no leg room for deductions for life insurance premia.
“There is a need for providing special tax deduction up to, say, Rs.50,000 only for life insurance premia, (including term insurance and pension policies). This would also provide tax deduction parity for pension plans of life insurers with the pension plans under NPS regulated by PFRDA, which are entitled for an additional special deduction of Rs.50,000 p.a. under Section 80CCD(1B),” Baradhwaj stated.
With rising interest rates and the Ukraine war still underway, finance minister Nirmala Sitharaman has a tough task of maintaining the resilience of the Indian economy while presenting the budget 2023. According to Athalye, infra spending can be one of the vehicles, and the life insurance industry can be a partner in progress for the government by providing long-term funding for infra.
Among other issues, the industry also highlighted clarity in the taxation of life insurance business. They said there have been many tax litigations on income-tax assessment of life insurance companies.
“The Central government needs to form a Joint Consultative Committee of Tax and industry experts to make recommendations for amendments to IT Act, 1961 on taxation of life insurance business, besides working out a formula for settling the outstanding tax litigations. An attempt was made in the draft Direct Tax Code 2010 to bring clarity on this subject, but the draft Code lapsed subsequently,” Baradhwaj said.
Athalye pointed out lack of clarity around the new Unit Linked Insurance Plan (ULIP) taxation regime introduced in the 2020 budget or taxation of non-exempt life insurance products as capital gain or otherwise, is doing no good to the policyholders.
At present, the sale of security and mutual fund redemptions are not subjected to TDS. Similarly, Athalye urged life insurance taxable proceeds should be out of the TDS net.
The government should use the existing strong reporting system of life insurance companies to generate information and drive compliance. “I believe these few administrative actions will go a long way in creating a robust growth engine,” Athalye noted.
According to a KPMG analysis (2022), the broader themes for the industry will be around consolidation, possible increased foreign capital, capital market activity, ecosystems, technology and big data as well as solvency and reporting.
The insurance industry is expected to grow at approximately 15 per cent in a three-to-five-year horizon while rapidly adopting digital and big data, the analysis stated.
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