Incentives for long-term savings a key issue

The insurance industry in India has come of age. With 44 companies in the life and general insurance space, and many more in the waiting, the industry is one of the most prominent segments of the financial sector.

Much would depend on the government’s policy to incentivise long-term savings. After all, the capability of the insurance to generate long-term funds for economic growth has often been emphasised. An increase in the foreign direct investment ceiling to 49% will also bring in much needed capital.

While Budget 2009 did not have much to offer for the insurance industry, it was an eventful year nonetheless, with new directives and regulations being put in place by the Insurance Regulatory & Development Authority (Irda).

The regulator introduced an upper ceiling on Ulip (unit linked insurance plans) charges and permitted online purchases of insurance plans. While Irda relaxed solvency requirements for a host of plans, it also called for higher disclosure by the industry.
As companies have been swiftly adapting to the changes being introduced, they are also bracing up to the next round of challenges including IPO guidelines, new bancassurance norms and implementation of the direct tax code.

Raman Garg, deputy CFO, Max New York Life Insurance, said, directionally the Budget should encourage long-term savings by instituting a separate limit for tax exemption for long-term saving instruments, increasing the limits under Section 80 C, granting tax exemption on annuities and removing the service tax levied on charges other than asset management charges for Ulips.

“A separate limit for tax exemption for long-term saving instruments like life insurance or increasing the limits under Section 80 C and 80D for tax exemption on life and health insurance premium could be one way to promote savings. Annuities should be made tax exempt or alternately only the interest on contribution to pension schemes should be taxed (instead of the 1/3rd rule),” he added.

Deepak Sood, CEO & MD, Future Generali India Life Insurance, said the Section 80C limit should be raised to Rs 3 lakh to mobilise funds for long-term infrastructure development. “There should be a separate limit for pension plans. This is primarily in view of regulation of separate pension plans”.

“We believe clarity in taxation of life insurance companies will help insurers plan and price products better. Considering the impact of inflation on health services, the current limit under Section 80D on health insurance should be raised from Rs 15,000 to Rs 25,000,” Sood added.

Most private sector insurers felt the 8 years allowed for companies to carry forward losses may not be sufficient for them to absorb the losses.

Garg, of MaxNYL feels, “The government should consider introducing provisions in the Budget for extending the period of carry forward for life insurance companies to 15 years considering the economic slowdown, shortage in supply of talent and high attrition leading to increase in wages, increasing operating cost due to high inflation and cost of increasing penetration in rural markets.”

Vivek Sood, chief financial officer, Tata AIG Life Insurance Company Ltd, echoed the view. “While there was nothing specific for the life insurance industry in Budget 2009, the wish list for Budget 2010 includes 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”.

Sood said it is critical to align charges on investments in Ulip with that of mutual funds, where only fund management charges are taxed and there is no tax on entry/exit loads.