Budget 2023: Tax on high-premium policy may hit life insurers' top line

The Budget proposal to tax income from traditional insurance policies, other than unit-linked products (ULIPs), having premia above Rs 5 lakh in a year is likely to impact growth of life insurance companies and their margins. There, on the other hand, could be demand for high-value policies now to avail tax benefits, which only go away from April 1.

Through this decision, the government is aiming to plug the arbitrage, which high-net-worth individuals (HNIs) are using to get tax-free returns on their high-value insurance policies through Section 10(10D).

The stocks of life insurance companies reacted sharply to the announcement of the finance minister on Wednesday, with most scrip witnessing around 10 per cent fall in a day. On Thursday, however, of the five life insurance companies that are listed on the bourses, only two -- HDFC Life Insurance and Max Financial Services -- ended in the red. The rest -- Life Insurance Corporation (LIC), ICICI Prudential Life Insurance, and SBI Life Insurance -- witnessed marginal gains in the share price.

According to disclosures, ICICI Prudential Life Insurance’s share of the business of non-unit linked policies with an annual premium of above Rs 5 lakh is approximately 6 per cent of total annualised premium equivalent for M9FY23. For Max Life, the same ratio stands at 9 per cent; for HDFC Life, it is over 10 per cent. However, for SBI Life, the impact could be as less as 1 per cent.

HDFC Life’s management has indicated the likely impact on their company would be 10-12 per cent on the top line and less on the bottom line. And, the insurer will now strive to sell more to middle-class customers.

“We don’t expect this sale to completely disappear as among many levers, such as shifting to lower ticket size and alternative products, we are confident of retaining a significant portion of the sale. The VNB (value of new business) impact will be marginally lower than sales impact as such high-ticket size policies do operate at lower margins,” said Prashant Tripathy, CEO & MD of Max Life.

For IndiaFirst Life, non-ULIP policies exceeding Rs  5 Lakh of premium have a single-digit contribution to our overall business and the impact is expected to be muted, said Rushabh Gandhi, deputy CEO, IndiaFirst Life Insurance.

The impact of this decision by the central government will be most felt in the guaranteed return products segment, as the rest of the non-ULIP products would fall below the Rs 5-lakh ticket size threshold proposed for taxation. The government had earlier removed the tax exemption on ULIP proceeds received on maturity for the policies having premia over Rs 2.5 lakh.

“There is no indexation benefit and the entire gains will be taxed at a marginal tax-rate irrespective of the policy tenure, which typically stands at 15 years. This will reduce the attractiveness of non-par policies and with the proposed tax treatment, they will broadly come at par with bank-term deposits,” analysts at Motilal Oswal said in their report.

To sweeten the deal for customers, insurers may look to sacrifice their margins and offer competitive rates in this segment so that the flow of funds from high-net-worth individuals may not drop significantly.

According to analysts at Emkay Research, it can be argued that the segments at risk generally have lower profitability, but the impact on growth will also compel insurers to compromise a bit on margins. In the immediate term, non-par guaranteed products could see a fire sale over the next two months. “Overall, it would be interesting to see how insurers deal with distribution cost and opex (operating expense), as they attempt to keep their products competitive. On net, we see a 10-12 per cent reduction in the medium-term margins, coupled with moderated terminal growth and higher cost of equity,” they pointed out.

Meanwhile, analysts reckon there has been a structural shift in the government’s stance when it comes to exemptions provided to insurance. The big push towards the new simplified tax structure, which is devoid of any exemption, in this year’s Budget is also expected to have a negative impact on the insurance sector. Over the years, the dependence of life insurers on the exemption provided under 80C of the Income Tax Act has reduced, owing to a shift in the customer segment, but LIC’s dependence on this has remained fairly high.

“LIC’s ticket size is one-fifth of that of the private sector at around Rs 15,000 and hence, LIC could have a target segment buying a policy for 80C exemption benefits and could get impacted a bit more,” said Suresh Ganapathy, associate director, Macquarie Capital in his report.

“We don’t agree with the argument that the new taxation regime is more lucrative than the old taxation regime, which allowed purchase of insurance products and claim 80C taxation exemptions. We believe many people buy insurance because of taxation benefits at maturity which aren’t withdrawn except for high-ticket policies. Also, there are several other items in 80C and insurance exemption is not the main aspect driving the purchase,” he further said.