Selling life insurance in India will not be the same again. Hence, the way investors look at listed life insurers is also set to change.
The Union budget has given a choice to Indians wherein individuals can shift to a lower tax rate if they give up the benefits of exemptions, and life insurance policies are one such exemption. Granted, for a large swath of Indians, there is no real benefit in migrating to the new tax rates when exemptions allow for a sharply lower tax liability in the old regime. But one can expect some migration, especially those in the taxable income bracket of ₹5-7.5 lakh. Millennials willing to borrow rather than save and looking for more disposable income won’t think twice before chucking their decision to buy an insurance product.
Not just new business but persistency ratios could also get hit as existing customers rethink their decision to hold on to policies. Analysts recognize this threat to growth.
“Most of the industry premium enjoy tax advantage currently, but risk of uncertainty lies in the part that is largely motivated by tax-benefit—lower ticket size ULIPs & par-savings products primarily," said a note by Jefferies India Pvt. Ltd.
Private sector life insurers will have to up their game in selling insurance products. To be fair, they have been doing so recently. Most advertisements of insurance policies promote life protection and the tax exemption benefit is added as an afterthought. However, the strong distribution network of insurance agents, which forms the backbone of sales, still peddle insurance as a tax-saving product.
If investors thought this was worse, insurers got hit by another decision—the abolition of dividend distribution tax (DDT). By making dividends taxable in the hands of the investor, the government has taken a chunk off the earnings of insurance companies. “With dividend income no longer tax-exempt, margins and embedded value will be affected," said analysts at Jefferies India.
Nomura Financial Advisory and Securities (India) Pvt. Ltd estimates the removal of DDT will have a 5-10% hit on value of new business if companies don’t change their pricing. But life insurers will benefit too as the dividend they pay to shareholders won’t be taxed with DDT being abolished. Perhaps this would encourage insurers to distribute more dividends to shareholders but the jury is still out on this one.
Life insurers need not despair. As the chart shows, insurances sales have been shedding their tax-saving label of late. Analysts at ICICI Securities Ltd argue that while there could be a short-term impact on purchase behaviour post the removal of tax incentives, life insurers will adjust the pricing curve accordingly to keep cost of insurance unchanged for marginal consumers.