A proposed new direct tax law will be a setback to shareholders and customers of life insurance companies. According to global actuarial and consulting firm Milliman, the embedded value - a valuation measure for life companies - is expected to drop by 25%.
Last month, the government set up a six-member task force to work on a new direct tax legislation. The new law is expected to be in place by 2019 and is aimed at simplifying tax by reducing tax rates and removing exemptions.
According to Milliman, the margins for Indian insurance companies as a percentage of value of new business (VNB) is the lowest in Asia. For listed Indian companies, the margin ranges from 10.1% to 21.6%. According to Mr Sanket Kawatkar, Milliman's principal and life insurance practice leader (India), the slim margins are a reflection of the low share of protection policies and stringent prescriptions by the insurance regulator on charges, reported Times of India. In contrast, AIA, which operates in Asian emerging markets, has a VNB margin of 52.8% and Aviva Singapore 85%.
According to Mr Kawatkar, the proposed direct tax legislation could shave off 25% from the embedded value of the companies. Also the reduced tax benefit for customers would have implications for future growth that could impact share prices of listed insurers. He also said that part of the recent record growth of the insurance industry was fuelled by the demonetisation move made in November last year. However, it has been difficult to sustain this and in September 2017, growth had eased to 4%.
The government is overhauling direct taxes as the existing law covering income and corporation tax is 56 years old. Lower income tax rates, a wider tax base and fewer exemptions are the overall aims of the new direct tax code being put in place by the taskforce. Currently, only 4.5% of India’s 1.3 billion population pay direct taxes.