Government aims to plug the arbitrage which HNIs and other wealthy individuals are employing to get healthy tax-free returns on their lumpy Non-Par insurance
The cap of Rs5 lakh will be applicable for all policies bought across insurers. Thus, as the policy buyer exhausts its tax-free limit of Rs 5 lakh with the prime insurer, this may affect the demand for secondary insurers
Non-Par premium growth to get impacted;VNB impact more moderate
In the Union Budget 2023, the finance minister has proposed to tax the proceeds received from the life insurance policies (other than ULIPs) having an aggregate premium of more than Rs 5 lakh a year.
This provision will be applicable for policies issued on or after 1- Apr-2023 and can impact the sale of guaranteed return/Non-Par business. With this measure, the government aims to plug the arbitrage which high net-worth policies (HNIs) and other wealthy individuals are employing to get healthy tax-free returns on their lumpy Non-Par insurance
Non-Par volumes to get impacted:
The Non-Par segment has been witnessing a strong trend and has been the key driver of growth over the past few years. We note that while the average ticket size across products stands much lower, the imposition of tax on maturity proceeds will reduce the attractiveness of Non-Par products for HNI/wealthy customers and may adversely impact the premium volumes.
Further, the cap of Rs 5 lakh will be applicable for all policies bought across insurers. Thus, as the policy buyer exhausts its tax-free limit of Rs 5 lakh with the prime insurer, this may affect the demand for secondary insurers.
However, income from such policies will remain tax free if received on death and
deduction for premium paid will also be allowed if tax deduction has not been
claimed on the premium paid for the policies.
Arbitrage vs deposits to reduce:
There is no indexation benefit and the entire gains will be taxed at marginal tax-rate irrespective of policy tenure, which typically stands at ~15 years. This will reduce the attractiveness of Non-Par policies and with the proposed tax treatment, they will broadly come at par with bank term deposits.
Topline and VNB impact for life insurers:
HDFCLIFE has indicated that owing to this new regulation, the new business premium could be adversely impacted by ~10-12%.
Max Life too has a higher exposure towards the Non-Par segment, and thus,
could have a high single-digit impact on the topline. On the other hand, SBILIFE
appears to be the least vulnerable, given the granular nature of the business and
lower exposure to the Non-Par segment. IPRU though does not share the mix of
PAR/Non-Par separately, we believe it to be placed in the middle.
The impact on profitability (VNB) will be lower as these high-ticket policies offer
better IRRs to buyers, and thus, make relatively lower margins for the
HDFCLIFE has indicated that the impact on VNB will be 5%, assuming it does not take any step to control the damage, while for other insurers, the VNB impact will be easily sub-5%.
Persistency trend of old Non-Par policies to improve further:
Further, this measure is applicable for policies purchased on or after 1-Apr-23, and hence, would not affect the persistency of the policies purchased in the past. The
persistency trend for previously purchased policies will only improve as the
product proposition has now reduced with the introduction of this tax.
Valuation and view
Thus, the impact of the above regulation on new business premium is likely to be
~10-12% for HDFCLIFE, while for others barring (Max Life), the same is expected to
be relatively lower. Assuming that the companies will take some measures to
mitigate the damages, the new business premium could get adversely impacted by
low-high single digit range for private insurers.
However, the impact on profitability (VNB) is likely to be lower as these high-ticket policies have a higher maturity payout, and thus, make relatively lower margins for the insurers.
Source: Motilaloswal, Company