1. Enhanced tax breaks can play a role in incentivising insurance purchase.
Incentivise health insurance: A classic case in point is health insurance. According to the World Bank, India's health expenditure as percentage of GDP in 2014 was 4.7%, lower than the world average of 9.9%. Low public expenditure on healthcare can prove detrimental to the savings of patients and their families, as it increases their out-of-pocket expenditure. To address this issue, a universal health care scheme will be a welcome move to cover vulnerable sections of the population. Moreover, increasing the tax exemption to 100% of premiums paid for private insurance can motivate people to buy additional health cover. This will also help increase health insurance penetration, which was a mere 0.20% of GDP in FY15.
Lower service tax burden on term life and health insurance: Swiss Re's 2015 Mortality Protection Gap study found that for every $100 needed for protection in India, there is a massive protection gap of $92.2. Mortality protection is at the core of life insurance, and the proposed Goods and Service Tax (GST) on insurance is reported to be in the range of 18-24%, which is higher than the 15% service tax levied currently. At minimum, the government can consider exempting pure term plans and health insurance from GST or service tax. These products provide basic protection and are not purchased for financial returns.
Encourage long term savings products: In 2015, our elderly made up 7.5% of the population, and according to UN estimates, this proportion will increase almost threefold to 19% (324 million) by 2050. To sustain this aging population, we need to start now. Consistent investments in pension and annuity products will be required in the years to come. Considering this, service tax or GST can be exempted on annuity premiums. Income tax can also be either lowered or removed completely on annuity proceeds/pension income.
2. Mandatory home insurance can reduce the loss burden of natural catastrophes.
India is vulnerable to a number of natural catastrophe risks including flooding, earthquakes, storms, droughts and landslides. There is a large property protection gap in India according to Swiss Re's 2015 Property Protection Gap study. In our sigma study 'Under insurance of property risks: closing the gap', we found that India is one of the countries most under insured relative to GDP, with penetration for property insurance as low as 0.07% as compared to other markets like Brazil (0.36%), and Russia (0.23%). With the young workforce buying homes and the government aiming for affordable housing for all, there is a need for home insurance at least against natural perils in the top 10 urban areas. Separate tax exemptions for home insurance, can motivate people to buy such cover. As a next step, mandatory home insurance can be considered which will not only provide protection against natural catastrophes, but can also reduce the burden of these losses on Government coffers.
3. Digitisation can make insurance products viable and accessible.
After demonetisation, digital payments through various schemes are being encouraged and insurers now provide discounts on insurance products bought online.They are taking this a step further by investing in digital marketing and underwriting platforms to develop a future ready insurance business. We need to continue these efforts even as insurers globally now partner with tech-savvy start-ups as a part of their new strategy. CB Insights data shows that in 2016, insurers around the world invested in over 100 insurance tech startups. India needs startups that can leverage digital distribution platforms to make insurance accessible across the country, and also build big data and machine learning capabilities to improve insurance risk assessment. We expect this trend to be further strengthened as the government encourages the start-up ecosystem in India.
In conclusion, there are several key issues currently being considered to help close the protection gap in India, and the Budget can provide pillars of support. There is an opportunity in 2017 to raise awareness on the importance of insurance, incentivize consumers to purchase more, leverage innovative technology, and push to further close the protection gap.
The writer is Head of Economic Research & Consulting, India at Swiss Re