Nothing much to cheer for the insurance sector

The guaranteed return product was the only growing segment and removal of tax exemptions on high ticket premiums will significantly impact the growth of the life insurance sector, points out a Credit Suisse report. After a slowdown in protection and ULIP, the guaranteed return products have become the largest growth drivers for large private insurers.

The budget announcement of the removal of tax exemption on high-ticket policies will directly impact the segment, Credit Suisse said.

ATS of non-single premiums (with ticket size of more than Rs 1.25 lakh) is Rs 3-3.5 lakh and such premiums make up 40-60 per cent of individual APE.

Assuming 1/3rd of premiums from policies with ticket size more than Rs five lakh, the impact on topline can be 18-22 per cent (including 5 per cent from single premium annuities), Credit Suisse said. The government has proposed that from FY24, proceeds received by a person, who makes aggregate contribution for life insurance above Rs 0.5m will be taxed. This applies to segments outside ULIPs (where cap is applied at Rs 0.25mn) and hence will include categories like non-par savings and par-savings, foreign brokerage, Jefferies said in a report.

Clarity is needed on two key aspects. First, whether the entire proceeds will be taxed or only the gains - if the entire proceed is taxed then it will be a big negative as it will involve taxing the principal as well, but if only gains/returns are taxed then the impact should be manageable. Secondly, clarity is needed on whether indexation benefits for inflation (as applied to mutual funds) will be available. If so, then the impact of tax will be small as these schemes pay between 5-6 per cent returns vs. inflation of 4-5 per cent, hence only the excess return will get taxed at a marginal rate, Jefferies said.

The new proposal will affect the non-ULIP savings segment like the most popular non-par savings among private insurers and par-savings, ULIPs, term protection and annuities will not be covered here. Both private insurers and LIC could make a representation to the ministry for clarity on the proposal as well as dilution to some extent to induce savings, Jefferies said.

The average ticket size of premiums is about Rs 0.1m with the share of more than 0.5m premiums forming about 10-15 per cent of premiums, Jefferies said.

This can narrow the tax arbitrage between term deposits with banks (on marginal rate of 25-30 per cent) and insurance policies (nil tax). If there is dilution in the tax arbitrage on select life insurance segments, it can be a positive for banks from the incremental term deposit growth perspective. Even mutual funds may gain a bit, but the retail segment has a low share in debt segment AUMs, Jefferies pointed out.

The insurance industry will make a representation on this aspect to the government and seek clarity. They may also restructure the product dynamics to reduce the ticket sizes by either increasing the premium paying term or spreading it across family members or diversify into semi-urban markets where ticket sizes are smaller. Still, until clarity emerges on key aspects like definition of aggregate premium and applicability of indexation benefits, overhang on stocks will stay, Jefferies said.

Speaking on the specific proposal, Prashant Tripathy, CEO & MD of Max Life said that "Max Life has a well-diversified product mix across products and customer segments. Our share of business from customers with the impacted non-unit linked policies with annual premium of above Rs 5,00,000 is approximately nine per cent of individual APE for 9M FY23 and was 6 per cent for FY22. 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".