Over the years with persistent Government’s efforts, the insurance penetration (premiums to GDP) in India has increased from 2.71% in FY01 to 5.20% in FY09 but thereafter the level of penetration was declining and reached 3.30% in FY14. To push it further, in 2015 Government of India has launched two insurance schemes under Jan Suraksha, – namely Pradhan Mantri Suraksha Bima Yojana (PMSBY) that covers accidental cover of Rs 2 lakh with Rs 12 premium and Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) for life cover of Rs 2-lakh with Rs 330 premium – to provide insurance cover to the mass at a cheaper rate. Subsequently, the insurance penetration has started increasing again from FY15 and is at 4.20% in FY21.However, India lags both in insurance penetration and density compared to other developed countries. In insurance penetration US is at 12.0%, UK 11.10%, in Asian countries like Japan at 8.10%, South Korea 11.60% and Singapore 9.50% and much below the world average of insurance penetration of7.40% (Life: 3.30& Non-life: 4.10 (Swiss Re, Sigma; 4/2021),
The Jan Suraksha schemes has helped in spreadingthe awareness about insurance, especially in the rural landscape. Till November 2021, cumulatively there are 11.46 crore persons enrolled in PMJJBY and 26.23 persons in PMSBY, with claim servicing ratio of 93.7% & 77.3% respectively. Apart from the PMJJBY & PMSBY, all the PMJDY account holders with debit card, are covered with inbuilt accident insurance cover of Rs 2 lakh. Further, it is interesting to note that the number of people covered through life insurance by insurance companies during May’2015 to July 2021 stands at around 17 crores, while Government sponsored PMJJY scheme has enrolled around 12 crore people during the same period. During 2020-21, the insurance industryhas covered a total of 101.62 crore number of livesunder Personal Accident Insurance. It includes49.04 crore number of lives covered underGovernment Sponsored Schemes namelyPradhan Mantri Suraksha Bima Yojana (PMSBY),Pradhan Mantri Jan Dhan Yojana (PMJDY) andIRCTC Travel Insurance for e-ticket passengers.
The pandemic induced disruption did result in a behavioural change of households with the life insurance industry registering a smart growth, with new businesspremium indicates that single premium income expanded by 26.1% in FY21, compared to 10.7% in FY20.Despite the strong growth, the Indian insurance industry needs further support from Government to have an insured economy going forward.
1. Expectation from the Union Budget 2022-23
Given the progressive mind-set of the Government, it is quite natural to keep high expectations in the forthcoming Union Budget 2021-22, which supposed to layout a clear roadmap to plug the protection gap, by increasing the insurance density in the country. In the following, we have briefly highlightedthe expectations from the budget for the Insurance sector.
2. Ensure Appropriate Taxation Policies
In India, insurance has always remained a push product, as a very fewnumber of people may demand it from their own. This may be due to lower awareness, literacy and other religious factors. Most of the people, especially in rural areas, used life insurance policies as a savings instrument but the trend is changing in urban areas. In urban areas, there has been a rising demand for term insurance policies in the last couple of years and Government should push these types of products to increase insurance penetration in the country.
Some recommendations relating to insurance sector regarding taxation is as follows:
- Enhanced deduction for insurance premium in view of continuing distress caused on account of Covid-19: Under 80C of the Income Tax Act, the maximum tax deduction is Rs 1.5 lakh, which includes a number of items like interest rate paid on housing loans, investments in tax savings bonds, PPF etc. Since, Covid-19 pandemic has amplified the need for adequate life and health insurance. To reduce social security burden on the Government exchequer, it is essential that citizens of the country opt for life and health insurance as per their personal requirements. We expect Government should consider as: (i) An aggregate deduction up to Rs 5 lakh should be provided for life and health insurance premium paid. To achieve this and to simplify tax laws, a single section may be introduced for insurance premium deduction. (ii) Alternatively, rebate of 30% (restricted to Rs 150,000) of the insurance premium paid should be available from tax payable on the total income. The deduction/ rebate for life and health insurance premium should be available irrespective of the taxation regime opted by individuals/ HUF since it will help to reduce social security burden of the Government.
- Zero or 5% GST on Pure Protection Insurance Polices:At present all insurance policies are taxed at GST of 18%. A significant reduction in premium will go a long way in building a secure nation where every household will have the ability to overcome financial stress caused by unforeseen events of life.So, the premium paid on insurance should not be taxed, as it is an instrument that provides financial protection against risk. Further, in India the insurance penetration is low; the introduction of tax in the realm of insurance may not represent the best step forward. After COVID 19 pandemic effect on the economy, it seems this is right time to reduce the GST rate to 5% or “Nil” rate on Life/health/Term insurance to cover maximum population of India.
- Unit Linked Insurance Plan (ULIP): In the Finance Act, 2021, various amendments introduced under the Act and Finance (No. 2) Act, 2004 with respect to taxation of unit linked insurance policies (ULIP) issued on or after 1 February 2021 and where the annual premium for any year during the term of the policy exceeds Rs 2.5 lakh, whether individually or in aggregate (high value ULIPs). While the intent of the Government appears to be to keep parity in taxation of mutual funds and ULIPs, it may be pertinent to note that there are key differences in characteristics of the two products such as: (i) Providing life cover to the policyholder is a key consideration under ULIP which is missing in case of mutual fund which is a pure investment product. (ii) An investor invests in units of mutual fund scheme and each scheme is independent. On the other hand, units in ULIP are under an insurance policy and within the same policy. (iii) Typically, the policy term of ULIP is around 15-20 years as against shorter time frame for mutual funds. (iv) Further, ULIPs have a minimum lock-in period of five years unlike mutual fund units which can be redeemed at any point in time.Further, considering the rising income levels, improvement in savings rate clubbed with stock market performance, the customers are more inclined to cover the risk of life along with the benefit of increase in fund value. So, it is recommended that the current limit of the annual premium for any year during the term of the policy exceeds Rs 2.5 lakh, whether individually or in aggregate (high value ULIPs) should be increased to Rs 5 lakh.
- Growing Disaster Risks
In India, the overall Protection Gap in all the segments (both life & Non-life) is about 70 to 80%. In other words, only 20% to 30% is being availed any type of insurance. To plug the protection gap quickly, in line with Jan Suraksha, Government should come out with some standardised products for various sectors so that the protection gap in each segment can be reduced significantly.
- Creation of an Insurance Pool:To meet the economic losses due to disasters, India should go for a public-private solution, say a Disaster Pool, for natural disaster risk involving the insurance sector could offer many benefits over government crisis loans and grants. By considering 2020 floods in India, the total economic loss was of $7.5 billion (Rs 52,500 crore) but insurance of only 11%. If Government would have insured it, then the premium for the sum assurance of Rs 60,000 crore would have only in the range of Rs 13,000 to Rs 15,000 crore.
- Introduction of compulsory home insurance for a minimum basic sum insured: The data on the frequency of natural calamities hitting the country has revealed very high number of losses to property, assets, and lives. While one protects family with life insurance and health insurance, people tend to overlook the need for home insurance. A natural calamity or any other misfortunate incident is not something one foresees. Since, a house is one’s biggest financial asset, introducing IT exemption on premium paid will push more people to opt for home insurance. In the wave of natural calamities over the past years, the worst hit was property / home. We strongly believe making home insurance compulsory for a minimum basic sum insured will lessen the burden on individuals / families, especially for those staying in calamity prone areas.
- Way forward Despite a huge potential market in India, insurance penetration in the country is still at a very low level. So, the insurers should not confine to the metro, urban or semi-urban areas. They also need to explore the business opportunities at every corners of the country, especially in rural areas. In doing so, the insurance companies should not look at this just as a regulatory requirement to be fulfilled. Instead, it should be looked at as an investment into creation of future business opportunities. The Government should push the insurers to steps like ‘adopting’ villages and giving basic facilities like drinking water, arranging free medical check-ups etc, which will help to develop goodwill and a market for the insurance industry in these areas.
Going forward, the present downward interest rate scenario may help the insurance sector to push up the business but the return on investment would decline due to the fall in G-sec yields (Parida, 2015). So, this is the best time for the insurers to tap the rural market and sustained in the business for a long term.