GST Relief On Insurance May Boost Demand But Hit Insurers In Near Term
The two-day meeting of the GST Council began here on Wednesday and it is expected to consider multiple scenarios for GST reductions.
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.
(Disclaimer: This report has been published as part of the auto-generated syndicate wire feed. Apart from the headline, no editing has been done in the copy by ABP Live.)
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