New rules for Insurance Sector, a positive or a negative move?

The Indian Government, in its FY22 Union Budget, has made two major announcements, (1) increased the permissible FDI limit from 49% to 74% in insurance companies and allowed foreign ownership and control with safeguards, (2) allowing tax exemption for maturity proceeds of ULIP policies having aggregate premiums of only up to Rs250k per annum (vs. no limit earlier). While increase in FDI limit is positive for the sector, it will increase competitive intensity for the larger and well-capitalized players where FDI was anyways significantly below 49%. On ULIPs taxation, it removes the tax arbitrage benefit that ULIPs used to enjoy vs. mutual funds, thereby reducing its relative attractiveness as a savings vehicle, though certain low cost ULIPs launched by bigger players remain more efficient than Mutual funds for investors.

Increase in FDI limits:

The Government has proposed to increase the permissible FDI limit from 49% to 74% in insurance companies and allow foreign ownership and control with safeguards. Under the new structure, the majority of Directors on the Board and key management persons would be resident Indians, with at least 50% of Directors being Independent Directors, and specified percentage of profits being retained as general reserve. This initiative is likely to provide much required capital to some of the smaller players in the industry as well as an exit to some of the existing JV partners. Given that most of the listed players are well capitalized and have seen their foreign JV partners exiting their holdings, except in case of IPRU, we do not see them as beneficiaries of these FDI changes. On the contrary, it could raise competitive intensity in the sector, especially in the non-life segment where companies may resort to aggressive pricing if equipped with easy capital. Hence, we view this as a marginally negative development for the listed insurance players but positive for the overall sector.

Taxation of proceeds from high premium ULIPs: 

Under Section 10(10D) of the Income Tax Act, proceeds from life insurance policies are tax free if the sum assured is at least 10X of the annual premiums. As per the government, this has resulted in instances of investing in ULIPs with huge premiums to claim the exemption which defeats the legislative intent of this clause, to provide benefit to small and genuine cases of life insurance. Hence, it has been proposed that (1) the tax exemption shall not apply with respect to any ULIP issued on or after February 1, 2021, if the amount of premium payable for any of the years during the term of the policy exceeds Rs.250k, and, (2) if premium is payable by a person for more than one ULIPs, issued on or after Feb 1, 2021, tax exemption shall be available only with respect to such policies where aggregate premium does not exceed Rs250k. However, any sum received on the death of a person will remain exempt. The tax rate applicable on the non-exempt policies will be similar to the concessional capital gains taxation regime as available to the mutual funds (@10% + surcharge/cess).

Stock Performance

S&P BSE Sensex was up only 1% (February 01, 2021- February 26, 2021) post Union Budget FY22 announcement, Here, we have discussed some insurance companies’ stocks that have given positive returns or have underperformed the benchmark index S&P BSE Sensex in the same period. 

Source: BSE

The stocks in the insurance sector have underperformed the BSE benchmark in the past 1 month. ICICI Pru Life tanked 5.9% from February 01, 2021- February 26, 2021. Similarly, SBI Life fell 2.3% in the same period. However, HDFC Life gained marginally 0.3% from February 01, 2021- February 26, 2021.