High-value insurance policies saw muted growth in the first six months of the current financial year after the Centre decided to tax such products in this year’s budget. At the same time, there has been a marked improvement in growth in the policies with premiums of ‘less than Rs 5 lakh’, which are mostly coming from smaller cities.
Finance Minister Nirmala Sitharaman proposed during this year’s budget that insurance policies (except for Unit Linked Insurance Plans or ULIPs) where the aggregate premium is over Rs 5 lakh and the maturity amount will not be exempt from tax. The rule was applicable to the policies from April 1, 2023.
Speaking during the post-earnings analyst meet, Niraj Shah, ED & CFO of HDFC Life Insurance said, “The greater than Rs 5 lakh business has come down, but it is still a fairly meaningful contributor.”
He further added that the segment contributes to nearly 6 per cent of HDFC Life’s business where it is seeing negative growth. On the other hand, the ‘less than Rs 5 lakh policies’, which accounts for 90 per cent of the company’s business, has seen an 18 per cent growth. It is the growth in this segment which has neutralized the impact on their overall ticket size.
Sharing a similar experience, Amrit Singh, CFO of Max Life Insurance noted that the ‘less than Rs 5 lakhs’ segment has grown at 21 per cent whereas the more than Rs 5 lakhs segment has also been growing but it has moderated as compared to the previous year.
Some of the companies also observed a possibility of shift from these policies to ULIP plans due to the tax exemption given to the category.
According to the management of ICICI Prudential Life Insurance, the non-linked APE mix has seen a decline from 28.8 per cent in the second quarter of FY23 to 25.8 per cent in the same period in FY24. On the other hand, the linked APE mix has increased to 33.9 per cent in Q2FY24 from 41.1 per cent in the year-ago period. The shift is attributed to a possible migration to linked products.
The non-linked products are insurance plans which are not linked to the stock market, and therefore, their returns are not based on the performance of the market.
“One of the reasons for the shift in mix is a significant proportion of more than Rs 5 lakh ticket size, non-par business shifting to linked and part guarantee products, and this trend has been increasing month-on-month in Q2-FY2024,” the management said during their post-earnings analyst meeting.
Further, Dhiren Salian, CFO of ICICI Prudential Life Insurance said that, “one level of migration was towards unit-linked plans. The second migration is towards participating plans.”
As a result of the tax imposition, insurers are seeing a reduction in business from the tier 1 cities due to the concentration of over Rs 5 lakh ticket size policies from this region. Whereas, tier 2 and tier 3 cities have been registering faster growth.
“We have seen tier 2 and tier 3 markets grow much faster for us, almost double of what we have seen at the company level. Of course, tier 1 has had an impact this year because the greater than Rs 5 lakh ticket size normally concentrates in tier 1,” said Suresh Badami, Deputy Managing Director of HDFC Life Insurance.
Speaking on the impact of the tax reform, Siddhartha Mohanty, Chairman of Life Insurance Corporation of India (LIC) said that the life insurer had a very minimal impact on the taxation. “It will be very less, I think less than 2-3 per cent not much on the premium side and policy side it was something like 0.14 per cent.”
The life industry remains watchful of the growth numbers in the second half of the financial year.
“With the final phase of the fiscal approaching it will be an interesting time to see how the industry numbers pan out. I am confident that our strategies will enable us to tie the phase,” noted Tarun Chugh, MD & CEO of Bajaj Allianz Life Insurance.