In a research report, Emkay Global’s insurance sector analysts Avinash Singh and Mahek Shah said the Rs 5 lakh cap is likely to affect growth of about 10 per cent premium base for HDFC Life Insurance and Max Life and about 5 per cent premium base for SBI Life Insurance and ICICI Prudential Life Insurance.
However, the Section 80C of the Income Tax Act related impact is likely to be slightly higher for SBI Life (among private life insurers).
On net, about 15 per cent of overall premium for these players could be under severe growth risk, leading to about 3-4 per cent hit to growth expectations.
By tweaking the ‘New Tax Regime’ (launched in the FY21 Budget), the government has attempted to make it attractive — it has brought down taxes under this ‘exemption-free’ regime, thus reducing the tax-saving value of tax-saving instruments (such as life insurance policies) under Sections 80C, 80D and others of the Income Tax Act.
And by removing exemptions under Sec 10 (10D) of the Income Tax Act, the Budget has also proposed taxing the maturity and surrender amount of non-ULIP policies (purchased after April, 2023), if the total premium paid by an individual under such polices is more than Rs 5 lakh in a year.
The ULIP policies have already got a limit of Rs 2.5 lakh in the FY22 Budget, Singh said.
On net, the two alterations will have a material impact, with Sec 80C/D-related changes hurting growth in the masses segment and the removal of exemptions U/S10(10D) hitting growth of high-ticket non-ULIPs in the affluent segment as well as margins (if players choose to sacrifice margins for keeping the product competitive), Emkay Global said.
It can be argued that the segments at risk generally have lower profitability (owing to product design of higher ticket and high distribution cost in lower ticket), but the impact on growth will also compel insurers to compromise a bit on margins.
In the immediate term, non-par guaranteed products could see a fire sale over the next two months.
Overall, it would be interesting to see how insurers deal with distribution cost and operational expenses, as they attempt to keep their products competitive. On net, we see about 10-12 per cent reduction in the medium-term value of new business (VNB), coupled with moderated terminal growth and higher cost of equity, Emkay Global said.