By Bahroze Kamdin and Alifya Hakim
Insurance is an integral sector of the financial services industry and plays a significant role in the economic development of India, as inter alia, it provides long-term funds for infrastructure development.
In India, insurance penetration (premium as % of GDP) which was 2.7% in 2001, steadily increased to 4.2% in 2020 and remained the same in 2021. Insurance penetration for life insurance increased from 2.15% in FY 2001-02 to 3.2% in FY 2021-22, almost twice more than that in emerging markets and slightly above the global average. The penetration of non-life insurance increased from 0.10 % to 0.56%, during the same period.
There has been a sharp increase in insurance density (premium to population/ per capita) in India. While life insurance density went up from US$ 9.1 in 2001-02 to US$ 69 in 2021-22, non-life insurance density has gone up from US$ 2.4 to US$ 22, in the same period.
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During fiscal 2021-22, the gross direct premium of general insurers (within and outside India) registered YoY growth of 10.8%, due to growth in motor and health segments of insurance industry. Life insurance premium registered YoY growth of 10.2%, with new businesses contributing 45.5% of the total premium received by life insurers.
In FY21, 10.7 lakh new micro-insurance policies were issued to individuals with a new business premium of Rs. 355.3 crores (in the life insurance segment), and 53,046 new micro-insurance policies were issued in the general insurance segment (excluding standalone health insurers).
Globally, total global insurance premium grew by 3.4% in real terms. The life insurance segment registered growth of 4.5% in premium whereas non-life saw 2.6% growth, due to hardening of rates in developed markets.
As per a Swiss Re Report, India has estimated market share of 1.9% in total premium volumes in US$, making it the 10 th largest globally in 2021 and 2 nd largest in all emerging markets. India is poised to emerge as one of the top six insurance markets in the world by 2032, ahead of Germany, Canada, Italy, and South Korea, but still may have only approximately 4% share of the total global premium in US$.
Further, this year the IPO of Life Insurance Corporation (LIC
Government of India has played a crucial role by releasing various schemes and financial inclusion initiatives that have driven insurance adoption and penetration across all segments. The government’s flagship initiative for crop insurance, Pradhan Mantri Fasal Bima Yojana (PMFBY), has led to significant growth in the premium income for crop insurance. Ayushman Bharat (Pradhan Mantri Jan Arogya Yojana) (AB PMJAY) aims at providing a health cover of ?5 lakh per family per year for secondary and tertiary care hospitalisation.
Insurance cover for 44.6 crore persons under PM Suraksha Bima and PM Jeevan Jyoti
The insurance regulator IRDAI has also undertaken various initiatives towards boosting insurance penetration, such as permitting insurers to conduct video-based Know Your Customer (KYC), launching standardised insurance products, and allowing insurers to offer rewards for low-risk behaviour.
Some Tax Measures
The key tax change proposed in the Finance Bill 2023 with implications to insurance business are:
- Tax exemption removed for life insurance policies with high value insurance premium
Life insurance policies in India are mainly saving products with small protection component instead of being protection policies. The life insurance industry paid benefits of ?5.02 lakh crore in FY22, out of which only 8.3% benefits were on death claims. Thus, the need to tax large value life insurance payouts.
With the intent to limit income tax exemption under section 10(10D) of the income-tax Act 1961 (the Act), from proceeds of insurance policies with very high value, it is proposed to withdraw the exemption from the income received under a life insurance policy (other than unit-linked insurance policy for which there are separate provisions for exemption threshold and taxability) purchased on or after 1 April 2023, and the premium or aggregate premium of which exceeds Rs.500,000 in a year. Such income shall continue to remain exempt if it is received on the death of the insured.
The income is proposed to be taxed under the head “income from other sources”. As per the proposed amendment in section 56 of the Act, the difference between the insurance proceeds and the premium paid during the term of the policy shall be taxable as income. Further it has been provided that if the premium paid has already been claimed as a deduction (say under section 80C of the Act), the same shall not be again reduced in computing the income chargeable under section 56 of the Act.
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The proposed amendment will apply for life insurance policies taken on or after 1 April 2023. In Finance Act 2021, similar changes were made for withdrawing the exemption from investment in unit linked insurance policies wherein new policies purchased on or after 1 February 2021 having premium or aggregate premium of Rs.250,000, were brought under the tax net.
Since the law will be applicable from assessment year 2024-25, insurance companies will have to plan changes in their systems so as to be ready with the compliances related to tax deduction at source under section 194DA and 195 of the Act from 1 April 2023 on such policies issued after 1 April 2023.
- FATCA / CRS reporting
In order to penalise false self-certification provided by policyholders which in turn leads to furnishing of incorrect statement under section 285BA of the Act by reporting life insurance companies (i.e. reporting in Form 61B), it is proposed to amend section 271FAA of the Act. It is proposed to prescribe a penalty of Rs.5,000 on the reporting life insurance companies if there is any inaccuracy in the statement of financial transactions submitted by a prescribed reporting financial institution and such inaccuracy is due to false or inaccurate information submitted by the policy holder. This is in addition to the penalty leviable on such financial institution in the said section, if any (i.e. Rs.50,000 for furnishing inaccurate information in the statement of reportable account).
Further, it has been provided that the reporting financial institution shall be entitled to recover the sum so paid on behalf of such policy holder, or retain out of any money that may be in its possession, or may come to it from every such reportable account holder, an amount equal to the sum so paid.
This is a stringent provision proposed by the lawmakers to censure financial institutions rather than directly punishing those giving false declarations. Also, if there are no declarations provided or received by the insurance companies, will this penalty still be applicable? There could be situations where the reporting would be done by the financial institution and the account is closed and subsequently there is such false declaration. In such a situation, the financial institution shall not be in a position to recover any sum from the policyholder.
Conclusion
Important government initiatives, strong demographic factors, a conducive regulatory environment, increased M&As, increased foreign direct investment limits in insurance companies, emergence of digital platforms for insurance products, global technology, processes, increased awareness, vibrant distribution channels and international best practices will support the growth of India’s insurance sector. Earlier the government had encouraged savings through tax reliefs. However it now appears that the government wishes to tax income over a particular threshold from saving products, so as to tax the rich.
Bahroze Kamdin, Partner, Deloitte India and Alifya Hakim, Director, Deloitte Haskins and Sells LLP.
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