The Union Minister for Road Transport and Highways raised a hornet’s nest by urging the Finance Minister to reconsider the 18 per cent GST rate on health and life insurance. The upcoming GST Council meeting, scheduled for November 21, is expected to discuss various options, including reducing GST to nil for senior citizens and term insurance, as well as lowering rates for individual health insurance policies with a sum insured of up to ₹5 lakh. Currently, 74 per cent of GST revenues from insurance are allocated to States, generating ₹24,000 crore over the past three years. Optimising GST for senior citizen health insurance will contribute to welfare, but there are other critical issues within the insurance sector that could impact the government’s fiscal health and should be addressed.
In FY 2023-24, health insurance contributed ₹1,09,006 crore (37.62 per cent) of ₹2,89,699 crore in non-life premiums, with group health insurance accounting for ₹55,020 crore. However, group health insurance (excluding government business) has seen loss ratios exceeding 100 per cent from 2013-14 to 2022-23, according to the IRDAI Handbook.
For the three public sector insurers facing financial stress, the loss in this segment amounted to ₹12,718 crore, with a conservative net expense ratio of 25 per cent pushing the loss to ₹15,897 crore. This is nearly 92 per cent of the capital of ₹17,250 crore injected by the government since FY 2020 to maintain solvency. Essentially, taxpayers are indirectly funding corporate group health expenses.
Large insurance portfolios with high loss ratios over extended periods, coupled with operational inefficiencies, contribute to capital erosion. ICRA estimates that an additional ₹10,000 crore capital infusion is required for these three public sector insurers.
The Ministry of Road Transport monitors the pricing of the compulsory third-party (TP) motor premiums, which contributed ₹54,455 crore — 60 per cent of the ₹91,780 crore motor premium in FY 2023-24. The mix of motor premiums has shifted significantly over the past two decades from an 80/20 ratio of own damage (OD) to TP in FY 2002-03, to 40/60 per cent in FY 2023-24. Higher than stipulated commissions (acquisition costs) even for this regulated TP premiums, involving Motor Insurance Service Providers (MISP) and intermediaries, have over the years reduced the premiums available for insurers, thus diminishing investible funds.
Regulatory intervention
Several audits by the IRDAI have highlighted excess payments above regulated rates, classified as management expenses for advertising, risk consultancy, travel, call centres, or infrastructure. For example, a major insurer paid ₹30.73 crore for logo-sharing and ₹25.09 crore for infrastructure expenses in 2012-13, yet faced minimal penalties of ₹5 lakh each in 2016. While the penalty limit has since been raised to ₹1 crore, they do not act as a deterrent. As management expenses are now limited to 30 per cent by IRDAI (effective from April 2024), strict monitoring is essential to ensure effectiveness.
Many non-life insurers have a combined operating ratio (COR) above 100 per cent. To improve profitability, insurers need to focus on repricing portfolios, enhancing claims management, and investing in technological and operational efficiencies. Currently, only about 60 per cent of the premium paid by customers is available for pure risk cover due to intermediation costs, management expenses, and GST. Risk-based solvency is, therefore, crucial for aligning insurer strategies and achieving long-term profitability.
To improve industry transparency, the Insurance Information Bureau (IIB) or GI Council should publish premium and claims data for the top 10 group health, property, and casualty accounts over the past decade. Additionally, insurers should disclose their gross management expenses on a quarterly basis, similar to mutual funds. The financial statements of insurance intermediaries for the past five years should also be made public, with correlations drawn to non-fee income in the case of banks and NBFCs.
A comprehensive insurer-intermediary relationship matrix would help highlight any emerging concentration of power in the insurance sector. Furthermore, the company-wise and portfolio-wise GST collections should be reported.
The Indian insurance market is projected to grow at 7.1 per cent in real terms from 2024 to 2028, according to Swiss Re, outpacing the global growth rate of 2.4 per cent. The efficient management of the substantial insurance revenue (over ₹12 lakh crore in non-life and life premiums for FY 2023-24) could help boost GST collections, corporate taxes, and insurer investible funds. This, in turn, would enable the government to support the social sector.
While adjustments to GST rates on health insurance are important, a more effective metric of success would be how much the insurance sector can contribute to reducing the fiscal deficit. A comprehensive view of the sector’s operational and regulatory interventions is needed to optimise its potential for both economic growth and social welfare.
The writer is a senior insurance professional