Former LIC Chairman SB Mathur says the cost of insurance had gone up enormously, especially in the case of single premium products. He says tax sops are important in long-term products like insurance and pension schemes.
The government is considering several sops for the insurance industry ranging from an increase in the Rs 1 lakh exemption limit for income tax to service tax relief, to encourage individuals to buy life covers, finance minister P Chidambaram said on Monday.
Chidambaram, who announced a package of sorts for the insurance industry, said he has asked his officers to decide on by October 10 at least eight issues shortlisted after discussions with chief executives of life insurance companies and the regulator.
Mathur believes the rationalisation of the service tax will help boost the insurance sector. "We need to provide more options in pension schemes," he told CNBC-TV18 in an interview.
Below is the edited transcript of Mathurs interview with CNBC-TV18.
Q: These tax sops which are being spoken about especially the service tax cuts for first premium and for the upfront premium products. Is this going to mean that the insurance companies will be able to muster up a lot more money?
A: This will certainly help because the cost of insurance had gone up enormously, especially in case of single premium products. There is a misconception that single premium products are investment products, but single premium average premium is Rs 60,000 for the industry.
So, 3 percent service tax with single premium was hurting a lot. It is going to be very useful and beneficial for the industry and investors that insurance will now be not so expensive because of adjustment of service tax.
Q: The ministry has also decided to allow banks to act as insurance brokers so that they can sell products of more than one insurance company. What in your mind is the positives if this really comes through and how crucial this could be?
A: It is good in the sense that it opens up and gives more option to customers. But the point is in a bank where most of the time it is over the counter selling it is not reasonable to expect the sales person to have knowledge of all the products, of say 24 life insurance companies, at least not detailed knowledge.
Therefore, the industry had been lobbing you allow banks to continue as corporate agent, but allow them to represent more than one insurance company under each category, to begin with, it would have been much more helpful. But if banks are willing to act as brokers and take additional responsibilities, it augers well for customer.
This will not cure mis-selling which was the concern of regulator that there is mis-selling happening because bank in certain relationship with customers have a dominant position either as a lender or provider of credit or for other facilities. Sometimes it is a contract between two unequals. That has been the cause of concern of the regulator, so this will not help that concern.
Q: Now there perhaps are going to be some sops for even pension plans, money put in pension plans could be over and above that Rs 1lakh limit for which we anyway get tax exemptions. Is that likely to garner in a lot more money? All told would you say that the complex of lower taxes especially on single premium as well as perhaps putting the pension plan outside the Rs 1 lakh limit together would mean that the second half for insurance companies is going to look a lot better than the second half of last year?
A: It will certainly improve sentiments and encourage sales person who were greatly demoralised by the frequent changes happening in the product line and the regulatory environment. This is a great positive signal.
Tax sops are essential in a long term product because countries like ours where inflationary pressures are very high, long-term products whether it is insurance, pension or any other product require some support by way of tax benefits. Only thing which is required to be done by regulator is to give more option in pension schemes.