GST cut on insurance premiums may ease costs, near-term impact ahead

New Delhi [India] September 3: Health and term insurance premiums may become cheaper if the Goods and Services Tax (GST) Council approves rate cuts at its meeting, which began here on Wednesday. However, according to a report by HSBC Securities and Capital Markets (India), insurance companies are likely to face short-term pressure on profitability due to slower repricing of existing policies. The two-day meeting of the GST Council began here on Wednesday and it is expected to consider multiple scenarios for GST reductions. Currently, health and term insurance products attract a GST rate of 18 per cent.

Various proposals which have been referred to the council include complete exemption without input tax credit (ITC), a 5 per cent slab with or without ITC, or a 12 per cent rate with ITC. HSBC's analysis suggests that a full exemption could reduce health insurance premiums by around 15 per cent. Even a moderate 6 per cent rate cut under the 12 per cent GST with ITC scenario could ease costs for policyholders. However, the government may face a revenue shortfall of USD 1.2-1.4 billion annually from GST on premiums if exemptions are granted, noted the report. While lower premiums are expected to boost demand, insurance companies could see a 3-6 per cent impact on combined ratios (CR) in the retail health segment, primarily due to slower repricing of renewals which may take 12-18 months.

The expense ratios of insurers will also play an important role in determining transmission depending if ITC is available or not. "Standalone health insurers would see a relatively higher impact than multi-line insurers, largely on high exposure to retail health," noted the report, though growth prospects improve in the long run. "We think a large part of the impact would be transitionary due to slower back book repricing," the report added. The report concludes that GST cuts, if implemented, could bring long-term gains for both insurers and consumers, despite short-term margin pressures. Improved affordability may encourage more households to purchase health cover, supporting broader financial inclusion goals. (ANI)