Life insurance: More sops for long-term savings

India's Life Insurance industry is one of the fastest growing sectors with 23 licensed players operating in the sector. The Life Insurance Corporation of India (LIC), the sole public sector player accounts for more than 70% of the business, while the 22 private players occupies the rest of the business.

In 1999 the Insurance Regulatory and Development Authority Act was passed leading to privatization and growth of the industry. Until then, LIC was the sole player in the Indian life insurance sector.

The entry of private players, de-tariffing and recently the cap on commissions has increased the competition and proliferation of products. Compounded Annual Growth Rate (CAGR) of the life insurance industry for the period 2000-01 to 2007-08 has been rapid at 26%.

The performance of the insurance sector in financial year 2008-09 was largely influenced by the sub-prime crisis. Life insurance industry recorded a 10.15% growth in total premium income to Rs 221791.26 crore during 2008-09 as against 29.0% growth posted at Rs.201351.41 crore in 2007-08. The total issuance of new policies rose marginally by 0.1% to 5.09 crore in 2008-09, compared to 10.23% growth recorded in last fiscal

The cumulative new premium collection surged 29.2% to Rs 67557.61 crore during April-December 2009, compared with the collection of Rs 52298.86 crore in corresponding previous years period. The actual growth in new business premium collection during April-December 2009 has been substantially higher than Life Insurance Council's projection of 15% growth for 2009-10.

Insurance penetration in the country is growing but still very low. Tax benefits have been a significant driver of insurance sales over the years with almost 40% of the business in a particular year coming in the last quarter of the fiscal year (with almost 20% of annual sales happening in March).

Industry Expectations

"Align charges in investments in ULIP to that of mutual funds"-Vivek Sood, Chief Financial Officer, Tata AIG Life Insurance Company

• Align charges in investments in ULIP to that of mutual funds, where only fund management charges are taxed and there is no tax on entry/exit loads.Suitable amendments in the provisions related to taxation of life insurance companies, which are not amended since 1976,
• Extension of the present limit of 8 years for carry forward of business losses in view of long gestation period involved in life insurance business,
• Additional deduction of Rs 1.00 Lakh u/s 80C exclusively for life insurance premium,
• Increase in deduction of Health Insurance Premium u/s 80-D from existing 15,000/- to 30,000/-

"Pass insurance (amendment) bill to allow more FDI in insurance sector"-Kapil Mehta, Managing Director & CEO, DLF Pramerica Life Insurance Company

• Insurance (amendment) bill should be passed to bring in much needed capital to the industry.
• Government should offer tax incentives on financial products that have more than 5 years' tenure."

"Increase period for carry forward of losses for insurance sector to 12 years"-TR Ramachandran, CEO & MD, Aviva India

• A separate limit for deductions under Section 80C for long-term saving instruments like life insurance and pensions should be created.
• Insurance business is a long-term gestation business and most insurers do not make profit even in the 10th year. Hence, the period for carry forward of losses should be increased from 8 years to 12 years.
• MAT liability should not be levied on the assets of policyholders, which form a substantial part of the assets of the insurance company.
• Increase in FDI to 49% is long awaited and Industry looks forward to the approval of the Insurance Bill.

"FDI limit for Insurance should be increased from 26% to 49%"-Deepak Sood, CEO & MD, Future Generali India Life Insurance

• Insurance Act and laws should be amended primarily to increase the FDI limit from 26% to 49%.
• Under section 80C, which allows certain investments and expenditure to be tax-exempt, the limit of 1 lakh should be raised to 3 lakhs to mobilize funds for long-term infrastructure development.
• There should be a separate limit for pension plans not inclusive of 80C- 1 lakh limit.
• Clarity in taxation of life insurance companies
• The current limit under 80D on health insurance should be raised from 15,000 to 25,000".

"Institute separate limit of tax exemption for long-term saving instruments"- Raman Garg, deputy CFO, Max New York Life

• Encourage long-term savings behaviour by Instituting separate limit for tax exemption for long-term saving instruments, increasing the limits under section 80 C, tax exemption on annuities and by removing the service tax levied on charges other than Asset Management Charges for ULIPs.
• Annuities should be made tax exempt; alternately only the interest on contribution to pension schemes should be taxed (instead of the 1/3rd rule).
• Increase in exemption limits for gratuity payments to Rs 10 Lakhs for non-government employees and increase in exemption limit of Employers' contribution to any approved super-annuation fund from Rs 1 Lakh to Rs 5 Lakhs could be another way to promote savings habit
• The Government may also evaluate providing tax benefits (including service tax exemption) on promoting insurance and pension products below annual threshold of Rs 1000/- premium/contribution.
• Increased FDI ceiling to 49 % can bring in the much-needed capital for the growth of the sector and long-term development.
• Extend the period of carry forward of losses from 8 yrs to 15 yrs
• MAT applicability on Insurance companies at reduced rates based on financials as prepared under IRDA guidelines may also be considered.

"Continue tax benefits for life insurance with separate limit"-G V Nageswara Rao, MD & CEO, IDBI Fortis Life Insurance

• Budget should create a separate limit for life insurance premiums just like Health Insurance and Pensions enjoys.
• The complete exemption of annuity under pension plans from taxes, which is proving to be a deterrent for people to save for their retirement.

"Service tax payable on Ulips should be changed to bring parity with products of mutual funds" SB Mathur, Secretary General, Life Insurance Council

• Service tax payable on Ulips should be changed to bring parity with products of mutual funds
• Fiscal incentives needed to encourage savings in long-term instruments like insurance, pensions etc.
• Relax the provision of carry forward of losses on one time basis at least in the first 10 years of the operations of the life company.

Outlook

Many of the new players are yet to break even, despite 10 years since private players were allowed into Indian Insurance sector. In this background, some of the insurance players have sought carry forward of the losses to 10 to 15 years, from the existing 8 year period.  Considering the huge funds required, they also seek hike in FDI limit in insurance from 26% to 49%.

The recent guideline by the insurance regulator on ULIPs and improvement in the economic growth is expected to further boost sales of life insurance industry. Thus, the insurers are optimistic about sales during the last three months of the financial year, which accounts for almost 40% of the total business of life insurance companies. Overall, the Union Budget 2010-11 is likely to be neutral with positive bias for the Indian life insurance sector.