While the GST exemption on life and health insurance is expected to raise costs for insurers, it may not trigger an immediate rise in premiums. Insurance companies, which can no longer avail themselves of input tax credit (ITC), say they are assessing the impact of the changes to GST and will not hike premiums in the near term.
Complexities of lost input tax credit
Ankur Kharbanda, executive director, Niva Bupa Health Insurance, confirmed the company is not looking at any “immediate price increase,” even as it assesses the impact of the rate change. Kharbanda observed in a television interview that operating costs and commission payouts account for two-thirds of an insurer’s costs while reinsurance typically accounts only for a third. As such, an insurer would not get an input tax credit for two-thirds of the expenses.
Samir Shah, executive director & CFO, HDFC ERGO General Insurance, said the company is closely analysing the implications of the absence of ITC. “While it is anticipated that there will be lowering of the premiums due to lowering of the taxes, we are yet to understand the extent of this reduction as this will also depend upon availability of the input tax credit, which will become clearer over the coming days,” Shah said.
“Companies will have to decide how much hit they can absorb and how much they can pass on to their distribution partners and customers. We think the companies will not raise base prices but will absorb the impact,” analysts at Macquarie wrote. Analysts at Axis Capital believe a price increase of 2-4% across new sales, to compensate for the ITC loss, is possible. “We expect part of the cost increase will be shared by insurance companies, distributors and end customers,” they said.
Long-term affordability vs. short-term margin pressure
Amit Ganorkar, MD & CEO, TATA AIG General Insurance, believes the GST rate cut relief will help bring new customers, especially the missing middle class, into the health insurance ecosystem in the long run.“In a country where out-of-pocket healthcare expenses remain high, wider adoption of health insurance is critical to ensuring families are not financially derailed by medical emergencies,” he said.
Rushabh Gandhi, MD & CEO, IndiaFirst Life Insurance Company, said the GST exemption will also lead to some rebalancing in product preferences — particularly between individual term plans and group credit life. Gandhi added that despite short-term margin pressure, the expected growth in premiums will strengthen the industry over the medium term. Insurers currently claim input tax credit on expenses such as agent commissions, reinsurance, technology, customer support, and distribution. With GST reduced to zero, they will lose these credits.