“We will see health insurance becoming more affordable and it will result in a decent increase. We do expect a spike in health insurance sales, however, it will be post September 22 when the new GST rates will be applicable. Consumers are likely to postpone purchase of insurance and it might be a lull period till then,” an insurance official said.
The GST Council exempted GST on all individual health insurance policies, including family floater policies and policies for senior citizens, and reinsurance thereof to make insurance affordable for the common man and increase the insurance coverage in the country. With the GST on individual health and life insurance premiums reduced to nil from 18 per cent (earlier with input tax credit), consumers are expected to benefit from lower premiums.
“The change has a huge impact in making insurance affordable and accessible. It will take some time for customers to understand and purchase policies, but once they do, we expect more new buyers, senior citizens, to purchase policies. As more policies are sold, the operational cost is also likely to reduce,” an executive at a general insurance company said.
Meanwhile, the withdrawal of input tax credit (ITC) is likely to hinder the insurers from passing on the entire benefit of the GST exemption on customers and absorption of these costs is likely to impact the net premium.
According to Shivaji Thapliyal, head of Research and Lead Analyst, Yes Securities, the exemption of GST without the ITC benefits might result in a negative impact of 3-5 per cent of premium for health insurers, if they do not resort to any steps to mitigate the impact.
Analysts at Motilal Oswal explained that, “Ceteris paribus, companies (health insurers) will have to bear the cost of about 4-5 per cent, which was availed as ITC earlier. Assuming the base premium was ~100 and the customer was paying ~118 with GST, to maintain profitability, the insurer can increase the base premium from ~100 to ~104-105. Hence, the customer will see the benefit of a lower premium by ~13-14 (from ~118 earlier).”
The insurance companies can either pass on the entire cost to the customers in the form of increased premiums to mitigate the impact or they can reduce the distribution cost.
“The long-term consumer price is expected to decline due to the GST exemption given in individual life and individual health insurance, including reinsurance. This will be partially offset by the premium hikes needed to accommodate the now non-creditable input tax costs. Since, input services comprise a significant part of operational costs, the loss of input tax credit (ITC) becomes a direct cost to insurers,” said Gulzar Didwania, partner, Deloitte India, adding that the net average impact of the same on gross premium is estimated to be around 3-4 per cent for both life and health insurers each, with each individual policy type having different impact.
“If they don't pass this cost to customers, they may see a direct reduction on their profit margins. Insurers may increase their base premiums to offset this incremental cost. However, in case of renewal premiums, Irdai regulations prevent them from increasing the base premium for existing contracts. This might put financial pressure on insurers,” he said.
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