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Tax exemption was never the main business proposition

With government lifting tax exemptions on ULIP returns for all prospective policies with aggregate annual premium of more than Rs250,000 (as a portfolio) in Budget 2021, the available universe of ULIP business reduces for Indian life insurers, especially in high net worth/affluent category. Diversified insurers with a wider reach will have relatively lower impact. Though the impact on Value of New business is small, it is incrementally negative for life insurers. However, increase in FDI limit in insurance from 49% to 74% is structurally positive. LIC IPO remains a big bang event.

* ULIP intensity (policies/premium per person) will go down. With all prospective ULIPs totalling more than Rs250k annual premium (sum of all ULIP policies), falling under the concessional capital tax regime (same as Mutual Funds), the incentive to buy ULIPs for any individual gets limited to the annual premium of Rs250k. At any point, if an individual has an ULIP portfolio with more than Rs250k annual premium, it will be taxable. As such, the ULIP intensity definitely goes down. This will lead to higher focus by insurance companies to widen distribution and sell policies to more people and as such improve the insurance penetration in India.

* VNB impact could be small, but should price to embedded value multiple tread lower? Considering the overall lower margin of ULIPs and a lower average ticket size, the VNB margin impact could be low and there is no impact on Embedded value. However, with a structural limit in ULIP intensity, the P/EV multiple can go down. Yet, one expects insurance companies to push more protection and more traditional products (all with higher margins than ULIPs) and improve persistency to enhance operating parameters. One must also appreciate the zero cost switching facility and available protection cover in ULIPs.

* ULIP remains pertinent for most consumers who seek tax exemption on premiums paid. As per income tax statistics for AY 2018-19, total tax payers stood at 58mn, of which 15mn fall under the bracket of Rs0.5mn-1mn income level. This segment could be sensitive towards the available tax exemption in order to buy insurance. While this segment is only ~5% of the total individual policy universe, it is a sizeable ~50% of the annual new policies issued.

* Higher ULIP ticket size insurers could face a bigger impact (refer Table 1).

* Advantage asset management company? With tax equivalence for annual flows of more than Rs250k between ULIP and AMC, there could be some switch from insurers to AMCs. Even, with distributors, MFs can now offer a better proposition.

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