The Hindu Business Line : General insurance premiums may head north from 2011-12

The Union Budget for 2009-10 has proposed an imposition of up to 30 per cent tax on equity investment income of general insurers with effect from April 1, 2011.

While the equity investments vary from insurer to insurer and on market conditions, for PSU general insurance companies – which control nearly 60 per cent of the market – an estimated 50 per cent of the investment income is generated from equities. The imposition of the tax may therefore entail near doubling of their total tax outgo.

The insurance companies may have to pass on a part of the additional cost to policyholders leading to a rise in premium rates of all non-life policies. Since de-tariffing in 2007, car insurance policies have become cheaper by 40 per cent and fire and engineering policies up to 70 per cent due to price war among the players.

“The customers might have to share a part of the extra burden as we would like to protect our bottomline,” Mr N.S.R. Chandraprasad, Chairman and Managing Director of the National Insurance Company, told Business Line. Out of a total investment income of Rs 1,000 crore, NIC clocked Rs 479 crore from capital gains in the equity market in 2008-09. The exemption in the investment income, Mr Chandraprasad said, was so far the only relief for the general insurers as the companies were facing diminishing margins on account of falling premiums and underwriting losses due to higher claims.

“Going forward, we might have to increase the premium rates as the tax outgo may increase by nearly 100 per cent,” a senior officer at the United India Insurance said.

The move, however, might not discourage general insurers to invest in equity as the returns from the equity market tend to be higher in the long run compared to other less risky taxable avenues, the Head of Accounts in a leading private sector general insurance company said on condition of anonymity.

Insurance companies use a part of the premium collected in settling claims and for other managerial expenses. The balance is invested in equity and debt market to generate income. While underwriting profits and income from investment in other instruments like interest and debentures are taxable, income from equity investments were so far kept out of tax net in accordance with a CBDT guideline.

The insurance companies, through the General insurance Council would appeal to the Centre for rationalisation of the proposed tax, Mr Chandraprasad said.