New tax regime, a sucker punch to the Life Insurance Industry
Following the release of the budget for FY24, the insurance industry, in particular the private sector companies that have sold life insurance to millions of Indians over the previous more than 20 years, seems to be in a state of shock. The stocks of various publicly traded insurance businesses have been equally lifeless in February, and analysts have reduced their projections for these companies’ growth, ratings, and target prices for the upcoming year as a result of policy actions. Following the release of the budget recommendations, the stocks of private sector insurers, notably HDFC Life Insurance, ICICI Prudential Life Insurance, and SBI Life Insurance, dropped by more than 10%. LIC’s stock decreased by 9%.
The government was given a number of pre-budget recommendations from the business community, but none of them were taken into account in the FY24 budget announcements issued on February 1. Instead, there was a kind of “dual punch” hit. The withdrawal of tax exemptions on revenue from non-ULIP (unit linked insurance plan) policies purchased after April 1, 2023, if the aggregate yearly premium is greater than Rs. 5 lakh, was announced by the finance minister Nirmala Sitharaman. The government also reduced personal taxes and made life insurance plans less desirable as pure tax-saving tools (under Section 80C) in an effort to push people towards a new tax regime with fewer exemptions.
To ensure volume growth, insurance companies will either need to alter their product mix or simply sell more policies. While they will continue to grow in 2023 and beyond, they will need to work harder to prevent premium volumes and margins from declining in the new fiscal year.
Insurance as Protection and not as an Investment
Life insurance policies have long been misrepresented as financial instruments that can generate returns, bonuses, and tax savings. In accordance with Section 80C (of the Income Tax Act of 1961), the tax savings on the payment of the policy’s premiums might be as much as Rs 1.5 lakh. Under Section 80CCD, contributions to the National Pension System (NPS) up to Rs 2 lakh also result in tax savings for the entire contribution.
The sale of an insurance policy as a financial product by LIC and its agents could be considered mind-control. Which is why before choosing which policy to purchase, individuals were hooked on returns on investments. Furthermore, the current government intends to alter this. The government’s budget initiatives encourage consumers to purchase insurance for protection rather than as an investment. Insurance has always been a push product in India, and for people to invest in insurance, they require a tax benefit as an incentive.
People will no longer be able to take advantage of any tax exemptions on life insurance purchases if they were to switch to the new system. The question of how many people will like the new tax regime over the previous one is also up for discussion. According to experts, a life insurance product’s appeal may decline over the course of the upcoming fiscal year, but it won’t completely disappear.
Indians have a tendency to save because they do not receive a retirement or pension income. It is anticipated that customers would continue to purchase insurance with the intention of saving money, including by utilising the 80C and 80CCD restrictions under the old tax regime. According to a Bajaj Allianz Life India poll on life goal readiness for 2023, life insurance is the top investment choice for 65 percent of goals. For a safe and worry-free retirement, this percentage increases to 77 percent. People aged 22 to 25 were surveyed in 13 cities, including metros, Tier 1 cities, and developing Tier 2 cities, in October of last year (2022).
How Insurers will be Impacted
Short-term growth will be significantly impacted by the elimination of the Section 10(10D) exemption on life insurance maturity and surrender proceeds. ULIPs with yearly premiums beyond Rs 2.5 lakh lost their exemption in the 2021 budget. This year’s budget has extended the cap on new non-linked policies purchased in FY24, where the premium is above Rs 5 lakh. There has never been a fair playing field between various investment types before. The government is attempting to level the playing field for all financial products with its most recent announcements.
According to data, the typical ticket sizes for individual regular plans with annual premiums over Rs. 1.25 lakh vary across companies. There are 1.19 lakh of these plans for HDFC Life, with an average ticket size of Rs. 3.3 lakh, and 1.23 lakh of these policies for LIC, with an average ticket value of Rs. 2.2 lakh. High net worth individuals will be impacted, but only slightly. LIC will be less affected than some of the private insurance firms because this market segment is still rather tiny.
Additionally, we might see a “psychological impact” of the new tax regime and the 80C exit on the market as a whole. There will be a short-term effect, but for the majority of individuals, other components of the 80C category [including EPF, PPF, and ELSS] will eat the cap. Therefore, even while a tiny portion of people who pay taxes may choose not to purchase a life insurance policy in the near future, this individual’s behaviour is likely to alter over the course of the following three to five years. One must realise that, except from life insurance, there is no financial product on the Indian market that gives savings for a lengthy period of time of over 25 to 30 years.
Rethink, Reimagine, Reinvent
Instead of concentrating on the sales of the high-ticket premium items, insurers will now need to change their product mix and begin selling policies more aggressively. The most efficient channels in the future months will still be bancassurance and agency avenues, but the emphasis will be on volume expansion. Increased product awareness will be necessary for insurers. Bancassurance will still be a powerful distribution channel, but to increase volumes, insurers will need to go into smaller areas and use other agencies and channels. Insurance companies must carefully plan their development into Tier 2–3 cities, which have previously been recognised as potential growth areas.
The visible impact of the budgetary announcements will be observed and quantified only after the development of product strategies and how the customer behaviour unfolds in FY24. The sector has to improve how protection policies are sold, target mass markets, and boost adoption. Some players will thus be put to the test more than others during the new fiscal to see how they handle volume growth, distribution expenses, and margins while maintaining the value and competitiveness of their offerings. It implies getting back to the fundamentals and doing the job effectively.
References:
ETBFSI: Impact of New Income Tax Regime on Insurance
PolicyBazaar: Impact of new tax regime on traditional life insurance
Business Standard: The life insurance sector’s trouble with taxation on high-value policies
