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February 27, 2001                                       Feedback  

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Run up to the Budget: Insurance sector

Background

  • The Indian insurance business is worth Rs 425 billion and yet its spread in the country is relatively thin and shallow.

  • LIC collected Rs 274.6 bn worth premium during the year 1999-2000 as against Rs 228.1 bn in 1998-99, representing a growth of 20%.

  • LIC has more than 91 mn policies in force, which is among the highest in the world. The total investible fund with the LIC is around 8% of India's GDP. The Gross Life Premium collected is about 1.55% of the GDP, while countries like South Africa, South Korea and Japan procure life premium exceeding 10% of GDP.

  • Confederation of Indian Industry (CII) has estimated that post liberalisation, the life insurance business is likely to grow to Rs 600 bn and the non- life insurance business to Rs 200 bn by year 2005. They are further estimated to grow to Rs 1400 bn and Rs 400 bn respectively by year 2010.

  • Low market penetration of insurance cover provides a huge potential to the insurance industry. Three fourth of the insurable population yet to be covered.

  • Unlike the pre-nationalization era, Insurance has now been opened up under the supervision of the IRDA. Being the prime authority over the players in the industry it has an important role to play in the development and regulation of the insurance market in India.

  • According to IRDA guidelines, there is a 26% foreign equity cap on insurance companies.

Key Players

LIC, GIC, National Insurance, New India Assurance, United India, and Oriental.

New Entrants

Except for Reliance, most of the Indian companies have joined hands with foreign insurance companies to set up operations in India.

Key private joint ventures are ICICI-Prudential, HDFC-Standard Life, Tata-AIG, Birla-Sun Life, Max India-New York Life, State Bank of India -Cardiff, Kotak Mahindra-Old Mutual, Royal-Sundaram Alliance, IFFCO-Tokio Marine.

Pre-budget expectations

  • Tax Laws and a host of structural issues for the insurance industry have come under close scrutiny by the Government. A lowering of income tax rates for life insurance companies may be announced in the union budget in line with the recommendation of the Eradi Committee on rationalisation of life insurance tax structures.

  • As against a flat rate of 12.5% of taxable profits paid by LIC, the committee has recommended that the surplus funds distributed to policyholders should be taxed at 7%. This will help LIC reduce its tax liability.

  • Profit on investments made by the insurance companies is currently taxed at 35% plus the surcharge. Considering the commitment of the Government and the IRDA in fostering the growth of the sector this rate of tax may be reduced in the forthcoming union budget.

Rediff-Dun & Bradstreet Budget Impact Analysis
Budget 2001

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