The Insurance Premiums Can Become Cheaper
The cost of health and term insurance could be reduced further should the Goods and Services Tax (GST) Council grant the proposed rate reductions in its current sitting, which started on Wednesday. The GST Council is also thinking of various rate-cutting options that might help take the strain off the health and term insurance markets that are currently subject to 18 per cent GST.
A report published by HSBC Securities and Capital Markets (India) has indicated that insurance premiums would significantly decrease in case the Council accepts reduced rates or exemptions. Nonetheless, this can also cause temporary pressure on the profitability of insurance firms, especially as existing policies and renewals will take time to reprice.
Industry stakeholders are keeping a close eye on the potential changes, and so are consumers, because the lower insurance prices might lead to growth in demand- as insurers get ready to deal with interim margin impacts due to the shift in the policy.
GST Council Mulls Multiple Tax Scenarios
- The two-day GST Council meeting began on Wednesday.
- The council is expected to consider multiple scenarios for GST rate reductions.
- Currently, health and term insurance products attract a GST rate of 18%.
- Proposals under consideration include:
- Complete exemption from GST without Input Tax Credit (ITC)
- 5% GST slab – with or without ITC
- 12% GST slab – with ITC
HSBC Forecasts Lower Premiums, Revenue Hit
HSBC’s analysis suggests that a full exemption could reduce health insurance premiums by around 15 per cent. Even a moderate 6 per cent rate cut under the 12 per cent GST with ITC scenario could ease costs for policyholders.
However, the government may face a revenue shortfall of USD 1.2-1.4 billion annually from GST on premiums if exemptions are granted, noted the report.
Short-Term Profit Pressure for Insurers
While lower premiums are expected to boost demand, insurance companies could see a 3-6 per cent impact on combined ratios (CR) in the retail health segment, primarily due to slower repricing of renewals which may take 12-18 months.
The expense ratios of insurers will also play an important role in determining transmission depending if ITC is available or not.
“Standalone health insurers would see a relatively higher impact than multi-line insurers, largely on high exposure to retail health,” noted the report, though growth prospects improve in the long run.
“We think a large part of the impact would be transitionary due to slower back book repricing,” the report added.
Long-Term Gains Despite Margin Pressure
The report concludes that GST cuts, if implemented, could bring long-term gains for both insurers and consumers, despite short-term margin pressures. Improved affordability may encourage more households to purchase health cover, supporting broader financial inclusion goals.
(Eith Inputs From NAI)
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