GST rate cut is a growth opportunity for insurers: Irdai chief Ajay Seth

Making insurance products more affordable shows that the govt views the sector as essential as food, says Irdai chief Ajay Seth

The exemption of individual life and health insurance premiums from the Goods and Services Tax (GST) enables the insurance industry to make products affordable and attractive, said Ajay Seth, chairman of Insurance Regulatory and Development Authority of India (Irdai) at the Business Standard BFSI Insight Summit 2025.

 

“What the government has signalled is that insurance firms have zero GST, and so do food products [processed]. The inference I draw here is that the government is putting insurance in the same category as food, which is essential for life. This is an opportunity for the sector to focus on the consumer,” Seth said in his first public interaction after taking charge.

 

The government in September rationalised the GST on premiums of individual life and health insurance products to zero from 18 per cent earlier. The input tax credit (ITC) that insurance companies could claim on the GST payment was removed.

 

Insurance companies have passed on the benefit of the GST cut to consumers, and they have committed not to alter product prices. The action will make insurance more accessible and support the sector’s goal of achieving ‘Insurance for All by 2047’.

 

Companies are adjusting their product mix and rationalising distributor commissions to offset the impact of the withdrawal of ITC. Insurers are taking a hit on margins but they believe that in the long run higher sales — driven by GST rationalisation — will offset the impact of ITC withdrawal.

 

About distributor commissions, Seth said: “The matter that requires the highest attention is distribution”.

 

“We have to go from a high-cost structure to a moderate-cost structure, with good service. In life insurance, 20 per cent of the risk pool is the cost of procuring it and managing it. And in that, a significant part is not really the risk pool. It has a lot of savings, too. Think of any financial sector that has a cost of savings and the risk pool is 20 per cent. For non-life it is 30 per cent. Commissions to corporate agents vary hugely. The largest life insurer after LIC [Life Insurance Corporation] spends 4 per cent of its premiums on them, while the second largest spends 17 per cent despite both getting 50 per cent of their business from this channel.”

 

Seth emphasised that he wants an “orderly” development of the insurance sector. “I draw strength from what Parliament has mandated: Protect policyholders’ interests and, on the other side of the coin, regulate, promote, and develop insurance in an orderly manner. Orderly development requires building a consensus on any reform.”

 

The insurance industry has dealt with multiple shocks for a couple of years. Reforms in direct and indirect taxes, regulatory changes, and other external factors have resulted in a slowdown. The industry is hopeful that starting next year it can accelerate growth.

 

“The sector, especially health insurance, is at an unstable equilibrium at the moment. On the life side, there is a low-efficiency equilibrium. But other sectors that manage savings of Indians are giving competition to life insurance companies. Is status quo the answer? If you want to live with a low-level equilibrium or an unstable equilibrium, then it is so. But does it require shocks? No, it requires an orderly transition to a better tomorrow,” Seth said.

 

The way insurance companies use capital must improve. “Legislative changes for 100 per cent FDI [foreign direct investment] will come in due course. But this alone cannot take care of the capital needs of the sector. The industry’s own capital is about ₹3.5 trillion. FDI is welcome. All those who have come in are welcome, and they have contributed. But the significant part is domestic capital. Of the ₹3.5 trillion, FDI is only ₹80,000 crore-90,000 crore. And not all is on the balance sheet of the insurance companies. Some of it has gone to pay previous shareholders.”

 

Irdai will work with the Securities and Exchange Board of India and the Reserve Bank of India to create conditions for a more mature bond market, Seth said.

 

The insurance industry has assets under management (AUM) of ₹75 trillion, but just ₹7.5 trillion goes towards infrastructure investment. Regulations do not stop insurance companies from investing more in various sectors.

 

“The regulations say insurance companies can invest at least 50 per cent in government securities, and the rest can be in corporate bonds and non-fixed income securities. It is a question of whether both pull and push factors will work. Today, the industry is looking for good quality paper. A fair amount of work is needed in terms of the pull factor”, he said, adding that the regulator cannot say one can invest in a particular product.

 

“It is when a consumer says that with a similar kind of risk profile, somebody else can give me X+delta (risk-sensitivity measure), why can you (insurer) not provide it? This push is needed. If guardrails are needed on getting into an area that is less safe, Irdai is ready to look at them,” he explained.

 

Seth spoke about Irdai’s Bima Sugam project, an online insurance marketplace that aims to be a single-stop platform for customers to buy, service, and settle claims for all insurance policies. Irdai considers Bima Sugam as a consumer-facing entity that has insurance companies as its backend. “We have made a beginning. The products and services should be coming to the market in the next few quarters”, he said.

 

The insurance industry will move towards IFRS or IndAS (Indian Accounting Standards) in about a year.

 

“The idea is to bring significant pieces around that and then provide a glide path to others, who may require time to reach there. Everybody will not be ready. Bigger companies will be while smaller ones may take some time”, he said, adding that IndAS is one of the enablers of the composite licence as without transparency on the balance sheet and the P&L (profit and loss) account one cannot get into composite insurance.

 

“The second piece of risk-based capital will flow from this. Risk-based capital will help a few companies but will be a challenge for others. So there we have to think about how to provide a glide path or give them a longer period to reach there. But the journey has to begin. The third piece — risk-based supervision — is one on which we have to spend time and I would like to have a conversation on this with the sector. Risk-based supervision needs solid corporate governance.”