By Kk Srinivasanm

Copyright thehindubusinessline

Finally, zero Goods & Services Tax (GST) on health insurance policies will be a reality soon. In an article titled ‘Why 18% tax on health insurance?’ in this paper on October 9, 2024, we had given 10 reasons for reducing substantially or abolishing GST on health insurance, and we stand vindicated.

While the decision will help all citizens, the health insurers seem to be somewhat uncomfortable as ‘input tax credit’ will not be available to them to defray partly the operational costs. This has raised concerns over the full transmission of the GST benefit to the insurance seeker.

Insurance world over has gained a reputation of being focussed solely on profits.

Insurance structure

But insurance, by definition, is meant to be a low-cost business. Basically, the insurers are required to manage the ‘risk fund’ created out of premium collections with minimum administrative and distribution costs. However, over time, insurance has turned into a high-cost business with huge internal salaries and commissions to agents, brokers and intermediaries, together accounting for 30-35 per cent per some estimates.

Consequently, the risk fund is eroded upfront, and any increase in claims is offset by increase in premiums. Moreover, insurers enjoy zero credit risk in premium collections, as in India, premiums, by law, are collected in advance.

For insurers, the positive way to render insurance affordable and widely penetrable is to curb operational costs.

However, there could be negative ways. For instance, there could be: (a) ‘product differentiation’ favouring higher premium policies, i.e., exclusion of certain facilities or benefits from ‘standard’ policies and their inclusion in ‘premium’ policies or (b) delay in claim settlement or random chopping of claimed sums by exploiting weaknesses in the grievance redressal mechanism.

The Finance Minister has assured that the government would persuade insurers to transmit the full benefit to the people.

However, if transmission does not happen, the option of disciplinary action against the errant firms must be exercised.

In India, health insurance penetration is low because the insurers believe that generally, the standard of health of Indians is not good enough, living conditions are poor and incidence of diseases is more so that premium rates cannot be kept low enough. As a corollary, they focus on urban and metro areas instead of rural and semi-urban (RUSU) areas.

However, ‘health awareness’ is spreading in all areas. There are both quantitative and qualitative ‘shifts’ in food habits and greater focus on physical fitness which will likely continue following the current across-the-board reductions in GST.

Besides, availability of public as well as private health services is slowly but surely improving, especially in RUSU areas, although affordability remains an issue.

Health insurers should view the issue of ‘affordability’ as an opportunity and penetrate the market. Moreover, health insurance is a recurrent business — yearly renewals are mandatory to keep a policy alive.

General insurers who also provide health insurance (i.e., excluding the Stand-Alone Health Insurers) have the leverage of cross-subsidising the low health premium by charging more premium in other business segments like automobile insurance, the demand for which is largely inelastic.

And, with reduction in GST on small cars, tractors, etc., this business is set to grow further.

More opportunities

Viewed from this perspective, this provides opportunity for the general insurers to explore new business areas such as catastrophe/climate insurance, which is the need of the hour.

The decision will likely stimulate cross-selling of insurance products by the public sector banks (PSBs) and private sector banks (PvBs). In this respect, the former is better placed than the latter as they own huge database of their customers, including in the RUSU areas, thanks to their participation in the financial inclusion drive. Therefore, for PSBs, customer acquisition cost will be low, unlike PvBs who have to work on this front further.

However, cross-selling needs proper staffing and incentivisation, besides curbs on mis-selling.

The government would find it easier to persuade the public sector general insurance players including PSBs doing cross-selling; however, negotiating with the private sector players (including banks) may pose some difficulties. Nevertheless, we expect ‘competition,’ coupled with ‘economies of scale’ that would accrue in the medium term, would make things easier.

The pre-requisites

The 18 per cent GST was not the only retardant against health insurance penetration. There are many other kinks that require levelling in order to facilitate GST abolition to make the penetration deeper, especially in the RUSU areas.

The insurance business is ‘agent-driven’ because insurance products are harder to understand than banking products. So the financial literacy drive, which has so far focused on banking, must be extended to insurance with insurance agents playing a crucial role.

People must be nudged to avail themselves of proper medical care which health insurance can facilitate. Here, personal touch, instead of mechanical messages, holds the key.

Poor standard of health especially among the young imposes colossal costs on a nation. The health insurers, among others, must realise this and shrug their profit obsession so that when the country, in the near future, graduates into an upper-middle class economy, they can also reap commensurate benefit.

India also needs an an exclusive health insurance regulator.

One of its functions should be to ensure that the insurers, hospitals and Third Party Administrators are kept at arm’s length.

There is merit in the argument favouring a regulator for private hospitals which are mushrooming across the country with many of them being corporates. These hospitals are largely driving medical inflation.

In sum, GST abolition on health insurance is expected to promote ‘inclusive insurance’.

Srinivasan is a former wholetime member, IRDAI. Das is a former Assistant General Manager (Economist), SBI. Rath is a former central banker. Views are personal

Published on September 10, 2025