GST relief to boost insurance penetration, ease burden on policyholders: Nilesh Sathe

The insurance sector has received a major boost from the government’s latest GST reform, with the tax on insurance premiums reduced from 18% to nil. The move, hailed as a much-needed relief for policyholders, is expected to drive penetration in a sector long criticized for low coverage.

Speaking to ET Now, Nilesh Sathe, former Member of IRDAI, welcomed the step, calling the earlier tax rate excessive. “Actually, 18% was too high. Charging 18% GST on insurance was brutal, honestly, and I have raised it in the past as well. Increasing penetration is not just the responsibility of insurance companies; the government also has a role to play, in which they must reduce the GST. I am happy that the government has taken this step, which will definitely push penetration further, especially in term insurance, because there is a huge protection gap in India that needs to be bridged. The target set by the government and IRDAI that everyone should be insured by 2047 will definitely be supported by this move,” he said.

Profit margins may squeeze

While the reform is good news for policyholders, insurers could face challenges in adjusting premium structures. “There are companies which have factored in input tax credit while deciding premium rates. Their profit margins will definitely squeeze because of the renewal book they have, as they will not have any authority to increase premiums in that case. New businesses may increase premiums by refiling the product, but that is going to be a tedious process because every product that has factored in input tax credit will have to be withdrawn and relaunched with higher premiums. Again, how policyholders respond to this increase in new business is uncertain. In the case of renewals, insurers have no scope to adjust, so profit margins will be impacted,” Sathe explained.

Consumers to reap benefits

Despite possible pricing adjustments, Sathe believes the reform will still benefit policyholders at large. “IRDAI may not force insurance companies to relaunch products, as that is within their authority. But the impact of GST falling from 18% to nil will definitely be passed on to existing policyholders, who already number around 25 crore in health insurance and 10 crore in life insurance. If insurers have to revise products to account for the loss of input tax credit, premiums may rise by 3% to 5% at most. However, consumers will still save significantly. For example, instead of paying Rs 18 in GST, they may pay Rs 3–5 more in premium. So indirectly, it is still going to benefit consumers. And I do not think IRDAI will intervene in deciding premium rates,” he said.

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