Insurance is a necessity in India in the absence of a social security net, but the government is taxing the sector heavily even as others in the financial sector are exempted, lamented former Insurance Regulatory and Development Authority (IRDAI) member Nilesh Sathe.

Sathe was the keynote speaker at the insurance round of the Business Standard BFSI Insight Summit.

“Charging 18 per cent GST (Goods and Services Tax) on insurance premium is atrocious,” the respected insurance veteran said in his customary frank manner.

“In the absence of any social security available to the citizens, insurance becomes a necessity. All essential commodities are out of the purview of GST, why should premium be taxed, and that too, so heavily,” Sathe asked, adding nowhere in the world one has to pay such heavy tax on insurance premium.

“There is no such tax on banking services or mutual fund services. These are also financial services, there is no reason why insurance services should be taxed and that too, so heavily. Even the premium for purchase of annuity attracts GST,” said Sathe in his speech.

Sathe said the government’s “clear apathy” towards the sector was evident when no immediate capitalisation was done to state-owned insurance companies when their solvency ratio (which must always remain above 150 per cent) fell below the threshold a couple of times.

The government is also not filling up vacancies in the insurance regulator fast enough.

“IRDAI is headless for the last five to six months. Members' positions are vacant. Institutions weaken if not manned on time,” Sathe said, adding, development of the sector is not the sole responsibility of the insurance companies alone, but all stakeholders will have to share the responsibility.

“The government has to ensure that the GDP grows, employment grows, and the per capita income increases,” said Sathe.

Insurance companies also have other challenges. Given the high solvency ratio, promoters must always infuse capital before an insurance company wish to grow exponentially. They cannot invest the way they like. The stipulation by IRDA that the insurance firms must invest at least half of their investible fund in government securities and other approved securities bring down the yields or internal rate of return for investors. This is because the yields on govt securities have been steadily coming down.

“Insurance companies undertake long term liabilities, but the market has no matching asset instruments, resulting in asset liability mismatch,” Sathe said, adding there is also a reinvestment risk.

The insurance company is a sunrise sector that can grow in double digits for the next few years, but increasing the penetration “is not the responsibility only of the insurance companies. It is the responsibility of all the stakeholders,” he said.

As the economy grows, so would be disposable income and domestic savings. As income level goes up, insurance penetration increases, Sathe said.

India’s “highly favourable demographics”, where around 40 per cent of the population is currently between 20 and 49 years, low social security cover, coupled with increasing life expectancy, will also fuel the need for insurance. In the country, about 40 per cent of the population continues to remain uninsured and the thumb rule of having 6 times the annual income as insurance is not adhered to here.

“As the level of education increases, the general awareness of insurance and its benefits will also increase, providing further filip to the demand,” said Sathe.

Technology has acted as a game changer, and there has been no data breach or security scare in the work from home environment during the corona period. Insurance companies, despite incurring losses in some cases, have settled over Rs 50,000 crore worth of claims last year.

Technology has been a gamechanger and there has been no security scare or database despite the work from home environment during the corona period. The insurance companies must share data between themselves, and must have a common database, particularly about cases of frauds, rejection and suspicious claims.

“Insurance is a need and let us spread it to the nooks and corners of the country,” Sathe said.

SOURCE : Business Standard

https://www.business-standard.com/article/finance/18-gst-on-insurance-premium-is-atrocious-former-irdai-member-nilesh-sathe-121110801513_1.html