The government on Monday announced a string of measures to enable the insurance industry to realise its potential to be a driver of savings that could be channelised into the infrastructure sector.
Finance minister P Chidambaram promised simpler life insurance products for the ?aam aadmi? as well as tax sops for policy holders, life insurance companies and their agents. He also prodded the sector regulator to frame relaxed investment norms to give more flexibility to life insurance companies to invest in infrastructure and debt instruments. Chidambaram said the Insurance Regulatory and Development Authority (Irda) regulator has agreed to tweak rules for insurers to invest in special purpose vehicles floated by private companies for infrastructure projects.
In all, the minister announced 20 measures to boost the country’s torpid insurance industry ? life insurance penetration is a dismal 4.4 per thousand at present ? in what confirmed the government’s broad objective of preventing further fall in the rates of savings and capital formation.
He said Irda would consider relaxing norms to provide that the minimum requirement of 75% of investments of life insurance companies in debt, (excluding investments in government securities/other approved securities) in AAA instruments would apply to debt investments including government securities and other approved investments. This is expected to release a space of about 12.5% for investments in less than AAA rated debt instruments.
?There are not enough AAA-rated instruments for them (insurance companies) to invest. Therefore, they have to look at other instruments. So now, they can look at AA-rated instruments. Irda thinks this change can be made,? Chidambaram said.
Anish Thacker, tax partner, Ernst & Young, said the move would definitely give a boost to the infrastructure sector as insurance companies, with significant funds, gain flexibility to invest in the sector. ?For instance, even if a newly formed SPV has the backing of a big parent company, it will take some time and operations for it to get a AAA-rating. This move will enable the insurance companies to invest in such an SPV even if it has only AA-rating,? he said.
The service tax incentives in the pipeline are in turn expected to make the products cheaper as the reduction/exemption is expected to be passed on by the insurance company to subscribers, analysts said.
Chidambaram also promised to pursue the insurance bill to raise the sector FDI cap to 49% from 26%. ?First, the official amendments will be approved by the cabinet, and then, it will be introduced in Parliament. Parliament will take a call on the FDI amendment. Irda is on record supporting 49% FDI in insurance,? he said.
At present, insurers are allowed to invest only in government-owned SPVs. ?It is a major shift in investment opportunities that will be available to insurance companies’ investible funds,? he said.
Referring to discussions held with Irda late last month, the minister told reporters that the regulator has agreed to soon take appropriate action on easing rules to allow consumers to buy a variety of risk cover products without going through the rigours of KYC norms every time.
Low returns, especially on complex Ulip products, and the lack of choice to consumers lowered total life insurance premium collection by 3% to Rs 2,83,315 crore during 2011-12 while first premium collection fell by 10% to Rs 1,13,678 crore.
?In a country with low spread and penetration of life insurance, the objective should be to sell simple and easily understood products,? Chidambaram said. Group insurance covers could be considered for self help groups, professional groups such as teachers in a school or nurses in a hospital, auto drivers? associations and domestic workers? associations, he said.
To speed up product approvals and offer more choice to customers, Irda will allow ?use and file? for standard products and frame a guideline for 30-day mandatory clearance by end of November. Irda will consider allowing banks to act as brokers to sell products of more than one company.
The minister also asked tax department to consider reduction in service tax rate on premium income and single premium policies, while exempting insurance schemes for the poor. Annuities could be treated on par with subscriptions to National Pension Scheme (NPS) and exempted from service tax rules.
The revenue department will examine whether, in addition to NPS, some insurance pension products as approved by Irda may be included in the separate limit over and above the limit of Rs 1 lakh under section 80C of the Income tax Act for the purpose of income tax deduction on the premium paid, Chidambaram said.
The minister has asked the Central Board of Excise and Customs (CBEC) and the Central Board of Direct Taxes (CBDT) to submit by October 10 their report on the changes in the tax structure for life insurance companies.
Chidambaram also assured he would look into the non-life insurance sector by scheduling a similar meeting with the general Insurance sector shortly.
