Cost of insurance for property and health could rise next year as proposed taxes on investment income will wipe out whatever margins are left for non-life companies. Balance sheet data for `08-09 of the non-life insurance companies in India reveal that whatever net profit was reported by the companies was on account of investment income. Last fiscal, the non-life industry collectively made underwriting losses (amount of claims exceeding premium income) of Rs 4,723cr.
But despite these losses the industry managed to stay in the black thanks to investment income of Rs 5,806cr. Part of this is from interest and dividend earnings but a significant portion is from profit from sale of investments.
The industry reported underwriting losses of Rs 4,723cr in `08-09 which was covered because of investment income. With the tax on investment income there is no other way out but to raise rates said SL Mohan, secretary general, General Insurance Council an association of non-life insurance companies.
Changes in income tax announced in the budget this year which have been reiterated in the new direct tax code (DTC) would mean that companies will have to pay tax on profits from sale of investments.
The non-life industry is treated like no other industry as it is not extended the benefit of capital gains tax and will be taxed at the marginal rate of over 30% even as everyone else including banks, investment funds and fund managers are eligible for long-term capital gains.
That is the inequity said Bhargav Dasgupta, managing director, ICICI Lombard General Insurance. Besides this the direct tax code requires insurance companies to pay tax on investment income and also a minimum alternate tax on 2% of their assets.
Like life insurers the non-life insurance industry also claims that the proposals wrongly include technical reserves, on which policyholders have claims, as part of an insurance companys own assets. What is worse the DTC requires non-life companies to pay tax on notional gains in value of their technical reserves.
The general insurance industry has seen its margins come under pressure in `08-09 as insurance rates fell due to competition while at the same time investment income also dropped. Compared to an operating profit of Rs 560cr in `07-08, the non-life industry reported an operating loss of Rs 1950cr.
We have three main tax issues. First is the tax on investment income, second is the service tax that has been made applicable on reinsurance and third the decision by the IT department to tax reserves for unexpired risks said Mr Mohan.
If an insurance company accepts premium towards an annual policy on the last day of the fiscal, the Insurance Regulatory and Development Authority allows insurers to book only 1/365th of the premium for the closing year and show the rest as reserves for unexpired risks. The Income Tax department wants the companies to pay tax on half the premium booked even on the last day.