A month on, GST 2.0 positive for customers, insurers face teething issues

Sales and inquiries see a spike, even as insurers plan to use multiple levers, including renegotiating commissions with distributors, to reduce the impact of withdrawal of input tax credit (ITC)

Sales of, and inquiries for, life and health insurance policies have seen a surge over the past month, reflecting the effect of implementation of zero GST on premiums as insurers have passed on the full benefit to customers. However, back-end challenges remain, particularly around managing the impact of the withdrawal of input tax credit (ITC). Insurers have indicated that they will pass on some of this impact to distributors and adjust their product mix to mitigate the effect, though margins are expected to take a hit in the short term.

 

In early September, the GST Council announced a complete tax exemption on all individual life and health insurance policies, and their reinsurance has also been exempted to boost penetration.

 

Insurers hope that the affordability of insurance products with zero GST will increase, leading to higher sales that will offset the short term pain they are currently going through.

 

"The protection category, which is health and life insurance, has shown up fairly well in the demand patterns," said Amit Chhabra, chief business officer (CBO) of General Insurance, Policybazaar. "There was a massive upsurge in demand, with also an increase in conversions. There is also a change in consumption pattern with people opting for higher sum insured or multi year policies."

 

In a post earnings call, Anup Bagchi, managing director (MD) and chief executive officer (CEO) of ICICI Prudential Life Insurance, said: “The early trends indicate a positive response after the GST exemption on life insurance. We have observed growth in website traffic, lead volumes, and conversion rates across product segments, indicating enhanced customer traction.”

 

Vibha Padalkar, MD and CEO of HDFC Life Insurance, earlier told Business Standard said that the company has witnessed more than 50 per cent growth in its retail term life insurance products in the month of September.

 

Overhauling distributor channel

 

Meanwhile, insurers have said that they plan to use multiple levers, including renegotiating commissions with distributors and other operating expenses optimisation measures, to reduce the impact of withdrawal of input tax credit (ITC) following the implementation of nil GST rates.

 

“... reducing distributor commissions is one lever. We are also looking at improving the product mix — offering more profitable products, cutting costs," Padalkar said.  

 

According to Animesh Das, MD and CEO, ACKO General Insurance, insurance companies are unable to claim ITC on commissions paid to distributors, resulting in a 5–7 per cent cost impact. Companies are managing this by either absorbing the cost themselves or sharing it with distributors. The consensus across the industry is to avoid passing this burden to consumers, as health and life insurance are considered essential products, he said, adding that operational challenges that emerged initially have largely been resolved, especially for insurers with integrated systems.

 

“Looking forward, the industry expects two key adjustments: reduction in distributor commissions and companies absorbing part of the cost. While the GST reduction has temporarily boosted demand, its effect is expected to be short-lived. Long-term growth will depend on continued product innovation, simpler distribution, and stronger consumer communication”, he said