Union Budget 2023: The insurance industry is a catalyst for developing economies of the world. Over the years, it witnessed substantial growth, enabled employment opportunities and secured small and large businesses by protecting them against unforeseen events/ losses. In a nutshell, it provides stability to society and a sense of security which perhaps cannot be quantified in monetary terms.

In case of unforeseen events, the policyholder viz; an individual or a large business house expects to receive maximum compensation from the insurance companies to cover up their expenses/ losses. As witnessed during the COVID-19 pandemic, people expected insurance companies to settle the smallest of expenses they incurred towards the medical treatment of their near ones. The insurance companies also stood strongly with their policyholders and settled the claims made. Insurance companies earn income in the form of premiums and settle claims as an expense. With a relatively small amount of premiums, the insurance companies settle huge claims though out of their pool of money. The recent pandemic has resulted in huge losses for insurance companies. Also, it is difficult to recoup the losses where the policyholder does not renew the insurance policies due to permanent damage/ loss of life/ property which was insured. This results in the accumulation of losses for the insurance companies.

Inflation is another factor that impacts the profitability of the insurance sector. The majority of insurance contracts come with a fixed premium for a long duration, be it general insurance policies renewed annually or life insurance policies where the premium is fixed at inception. Though the premium remains the same during the policy tenure, insurance companies need to ensure that the rising operation costs and their claim pay-outs are within the stipulated limits. Being a regulated entity, insurance companies do not have flexibility in charging the premium beyond the stipulated guidelines.

The insurance sector has its inherent problem of longer gestation periods. The increase in the number of insurers, competition and sale of insurance policies through online platforms have further increased the gestation period. 9 -10 years is the average timeframe that a newly set-up insurance company would require to break even.

The Income-tax Act, 1961 (IT Act) permits the carry forward and set-off of losses within a period of 8 years from the year to which such loss pertains. If the taxpayer is not able to set off the losses in these 8 years, the losses would lapse. A company in the insurance sector tends to incur losses for an initial span of 9-10 years and then starts to break even. In such a scenario, the span of 8 years falls short to set off its initial losses. Moreover, events like the pandemic further deepen the capacity to absorb the losses.

The insurance sector is eagerly waiting for the announcement from the Government for a longer period (say 10-12 years) before setting off their losses. The insurance sector is heavily regulated in India and has substantial public money at stake. Hence, the Government should consider granting a longer period to set off the losses to the insurance industry which will help the companies to operate their businesses more efficiently. Alternatively, the upcoming Budget can provide for a flexible block of 10 years within the period of 15 years (similar to the tax-holiday mechanism framed for units in the IFSC) for setting-off losses incurred by insurance companies. Such an amendment would not only provide an impetus to the existing insurance companies but also promote new entrants in the insurance sector.

The IT Act provides a separate tax regime for computing the gains/ losses of insurance companies. Budget 2023 can consider providing a mechanism to carry forward and set off the losses under the existing tax regime for insurance companies. Insurers, to a great extent, have still not recovered from the hit in their financials due to the pandemic. A significant rise in death and health insurance claims and a moratorium on health insurance premiums resulted in delayed and lower revenue inflow, making operations difficult. With rising losses and operating costs, it is a need of the hour to provide support to the insurance sector which has been perennially providing security to society.

Source: Financial Express