GST cut on individual life, health policies: Policyholders advised not to delay renewals

What should consumers do?

Insurance experts have said that there has been a lot of ambiguity around the GST cut for new customers and policyholders who have paid their premiums recently. Insurance companies said that they are expecting some directions on this from the Insurance Regulatory and Development Authority (IRDAI) soon.

“If there is a grace period in the policy, which usually is about a month after the date of expiry, and there is not clarity from insurance companies on the reduction in the premium so far, one can wait until September 22,” said Hanut Mehta, CEO and co-founder at BimaPay Finsure.

In case the last date of the grace period falls before September 22, policy holders should not discontinue their policy as it would result in the loss of benefits such as no-claim bonus and premium discounts that go for regular-paying customers, he said. “It is important to note for existing policyholders not to delay renewals in anticipation of GST benefits, as this could lead to breaks in continuity and loss of coverage,” said Dhirendra Mahayanashi, co-founder and CEO at Turtlemint.

According to a Kotak Institutional Equities report, some of the customers may use the one-month free look-back period to surrender policies bought last month and shift to newer, cheaper ones. A free-look period is a window in which a policyholder can cancel an insurance policy without paying any penalty. The time period is usually of up to 30 days from the date of policy issuance.

Input tax credit withdrawn

While individual life and health insurances have been exempted from GST, the input tax credit (ITC) has also been removed, putting pressure on margins of insurance players. ITC, under GST, allows businesses to reduce their tax liability by claiming credit for the GST paid on purchases.

According to a report by rating firm ICRA, insurers will partially absorb the cost and pass the remainder to customers. Even after a partial or full pass through of higher cost, the cost of insurance will be cheaper for customers. The policies that have already been sold were priced factoring in the ITC, which will no longer be available. Companies will thus absorb the associated cost, impacting embedded value from existing business.

Marginal rise in cost for insurers

Insurance companies currently claim input tax credit (ITC) on services utilised, which include distribution commissions, reinsurance and promotions/other operational expenses. While reinsurance services will also get exempted from GST, companies will continue to pay GST on other services, the Kotak report said. “A back-of-the-envelope calculation suggests that health insurance companies may need to raise tariffs by 3-5 per cent. This will help the companies compensate for the loss of input tax credit that is currently availed of,” the report said. However, the increase in tax may not happen on an immediate basis but with a lag.

At the same time, a 12-15 per cent reduction in price for the customer can potentially boost health insurance demand, it said.