Private sector insurer HDFC Life Insurance hopes to accelerate the pace of deeper penetration in tier-II and III cities and diversify its ongoing product portfolio to help reduce the impact of taxation on income from high-ticket non-linked life insurance products.
Life insurance companies are expected to take a hit by the budget presented by the government last week. It is proposed to tax income from all non-ULIP products, i.e. par and non-par, where the total insurance premium paid in a year exceeds Rs 5 lakhs.
“If we don't do anything, the hit could be around 10-12% of the total APE (annual premium equivalent). But obviously, we intend to do a lot of things to prevent that. So, when we will do all of that, the impact will be in the mid-single digit,” HDFC Life Insurance CFO Niraj Shah said in a release.
“We are confident of lowering the impact of the new taxation on APE, and thus, impact of VNB (value of new business) will also be lower, almost negligible. There would not be any impact on VNB margin,” Shah said.
In a stock exchange filing last Friday, the company said, “Our initial assessment indicates that the business at risk could be approximately 10-12% of the total APE and impact on value of new business would be lower than impact on total APE. We will be working on mitigating measures to deal with the impact in due course”.
“The impact of VNB will be lower because for the policies with larger ticket sizes customers prefer a lower premium payment term like 5-7 years. So, everything else remaining the same, as the policies of larger ticket sizes have shorter policy tenure, the hit on the margins will be lower relative to the policies of larger tenure with lower ticket sizes,” Shah explained.
Notably, JM Financial Institutional Securities, in a note, has said, “While protection segment will not be impacted (due to the tax), we expect non-par products will be impacted the most, given the higher ticket sizes.”
According to HDFC Life Insurance, this will accelerate its process of deeper penetration into tier-II and III cities as it will help the insurer reach more customers holding policies with different ticket sizes. Also, the company will continue to accelerate its security and annuity business to further diversify its product portfolio across various product segments.
“We are expanding rapidly into tier-II and tier-III towns. All our new distribution partners, India Post Payments Bank and AU Small Finance Banks, are largely operating in tier II, III cities, and beyond. Our acquisition of Exide Life was primarily for the tier II and III agency markets. So, we are broadbasing our business across customer segments and across geographies. Now, we will accelerate the process. It will help us reach more customers who will have policies with different ticket sizes. A lot of these will be lower ticket sizes and thus we will be able to expand business into areas beyond the segments where there could be a tax impact,” Shah pointed out.
He said the company has a very diversified business and also its sources of margins are very diverse. “We have products in savings, protection and annuity. So, from all of these segments the margins delivery is fairly robust. All the sources remain intact. For the past four-five years, there has been a significant change in product mix. Around 50% of our new business premium is coming from annuity and protection. We will continue accelerating protection and annuity business. Retirement plans are also very big opportunity for us,” he added.
Life insurance companies are planning to approach the finance ministry collectively. “Our view is that the proposed taxation will have an impact on the insurance industry. We will try and make our plea to IRDAI and the department of revenue. If our objective is to grow insurance penetration, then this tax would not support it,” Shah said.
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