Image: Danish Siddiqui/Reuters
The Narendra Modi-led government is taking a fresh gamble with the proposed listing of Life Insurance Corporation, among its most trusted family silver. This is the country’s largest life insurer and often comes to the rescue of several government-related market initiatives.
But it is the timing and the outcome that the government wants to achieve that is most confusing. India’s Finance Minister Nirmala Sitharaman has in her latest Union Budget speech
on Saturday made it clear that over a period of time, tax exemptions for individuals will be reduced and tax rates revised. This discourages investors from investing in insurance products, which will thus impact LIC’s business, and in turn, its valuations. Yet, the government wants people to invest in LIC.
“The industry opportunity is good but the government needs to be like a shrewd businessperson. It should have continued with incentives for insurers which would help improve LIC’s business and valuations,” says Abhimanyu Sofat, head of research at IIFL Securities. “If you are going to reduce benefits, the opportunities for insurance sector reduces. Oddly, they also want the maximum value for their business. This is where there is a disconnect.”
Wither insurance products?
Currently, premiums paid toward all life insurance policies are eligible for tax benefits under Chapter VI-A - Section 80C up to Rs 1,50,000. In the new tax slabs introduced by the government—in a move expected to reduce tax burdens for individuals—people opting for the new tax regime will have to forego this 80C benefits (relating to investments in PF, PPF NPS, mutual funds ELSS or life insurance premium). All of this raises doubts over the penetration of insurance products going forward.
“The Union Budget 2020 has been negative for the life insurance industry as the government has removed all major exemptions/deductions in the new tax regime, which takes away one of the key incentives that boost sale of life insurance products,” says Nitin Aggarwal, analyst at Motilal Oswal Securities.
Aggarwal adds that removal of major exemptions/deductions under the new tax regime will impact sales of life insurance products as individuals migrating to the new tax regime will lose on tax savings on their insurance purchase. But he feels that under the new tax regime
, tax liability for individuals (availing exemptions) will actually increase, and thus, a large section of individuals might not prefer to migrate, resulting in a modest impact on the new business sales of life insurers.
A slowing savings rate
In previous decades, India’s policymakers always encouraged savings, particularly by offering better returns on investments in PPF or NSC. But the households sector’s saving rate has fallen to 17.2 percent in 2017-18 from 23.6 percent of GDP in 2011- 12.
Investments in small savings, based on falling interest rates for PPF, pension schemes and post office deposits, are expected to be sluggish. Investments in gold and silver have fallen in the past four to five years.
The government is making it apparent that India must shift its model from saving to spending, so that consumption—at a seven-year-low of 5 percent in rural India—gets a kickstart. The probability of this being successful or not is equal, for one is assuming that people will spend over the long term by discouraging savings.
But financial advisor Ashvin Parekh says: “Policymakers must keep in mind the end-state. The end-state should be to encourage households to save for their old age and other exigencies or to encourage them to spend in asset-based consumptions. If the outcome is short-term in nature, it defeats the objective and the end-state.”
“The behaviour of spending during a working life of an individual and to depend on the state to provide for old age is too short-term, in my mind,” Parekh, managing partner of Ashvin Parekh Advisory Services, added.
Sitharaman has already been quizzed on discouraging buying insurance products for tax exemptions and wanting to build LIC. “I am now allowing retail investors to make up their minds as to where they want the money to be. They can still be with the LIC, they can still want to have the LIC’s issue ownership…that which I'm holding from the government now, will be available for the private retailers to hold. That is one thing,” she told CNBC’s Tanvir Gill in an interview
What Sitharaman hopes is that the move to list institutions such as LIC will make insurance players more nimble. A good thought, but in LIC’s case, it is not so easy. “I think the IPO offer of LIC has a lot more advantage to the sector than the limited option of giving incentive to go towards LIC or insurance because there is a car tax rebate given,” the Finance Minister had said.
Insurance companies make investments to generate returns and increase its actuarial surplus every year. This ensures that their liabilities—claims made by policyholders—are always met. However, in the case of LIC, which was formed in 1956 by nationalising around 245 companies and consolidated into a single entity by an Act of Parliament, its policies are sovereign guaranteed. It is a large pool of funds and the debate is still on as to who—shareholders or existing policyholders—have how much right over the LIC estate. The jury is out on this one.
Also, bankers will need to arrive at the insurer’s embedded value, which is the current value of future profits plus adjusted net value. It is also not clear how much stake the government will want to disinvest in LIC. There are just too many pieces of the puzzle that need to be found and fixed.