GST relief to drive modest tariff hike in health insurance, says Kotak

The Indian government's decision to exempt Goods and Services Tax (GST) on individual life and health insurance policies is set to create waves in the insurance sector. Effective 22 September 2025, these policies will no longer be subject to the 18% GST, potentially resulting in a 12-15% price reduction for consumers. However, this development may lead insurers to raise tariffs by 3-5% to offset the loss of input tax credits (ITC) previously applied to various services.

Kotak Institutional Equities has indicated that health insurers, including Niva Bupa and Star Health, might need tariff hikes to remain margin-neutral. The exemption on reinsurance services is a positive step, but firms will continue to incur GST on other operational expenses. The government's non-notification of the inverted tax structure (ITS) benefit for exempt policies limits options for insurers.

Niva Bupa is anticipated to face a more significant impact, potentially requiring a tariff increase of about 4%, due to its higher expense structure and ceding ratio compared to competitors such as Star Health. With an End of Month (EoM) ratio of 39% and a ceding ratio of 22%, Niva Bupa experiences a higher GST burden, which cannot be counterbalanced by ITC.

Despite potential tariff hikes, the shift to a 0% GST rate could boost demand, with consumers benefiting from lower premiums. Health insurance costs could decline significantly, though the timing and extent of tariff adjustments by insurers remain uncertain. Delayed tariff hikes are possible as companies evaluate market responses and adjust strategies.

Star Health, another key player, paid around ₹30 billion in GST during FY2025, net of ITC. To maintain profitability, Star Health may need to adjust tariffs by about 1-3%. This highlights the varied impact on insurers depending on their financial structures and strategies.

Additionally, the exemption may lead to a shift in consumer behaviour. There is a risk of policyholders surrendering existing policies during the free look-back period to switch to newer, cheaper options, posing challenges for insurers as they transition to the new GST framework.

Industry experts suggest that multi-line insurance companies might experience a mitigated impact, as revenues from other business lines could absorb some GST on shared services. This diversified approach offers some protection against the regulatory changes.

As the sector adapts, insurers and stakeholders are closely monitoring the situation. The potential for increased market demand coupled with necessary tariff hikes presents a complex landscape. Companies must communicate transparently with consumers and stakeholders during this transitional phase.