Health
and property insurance may get costlier next year as the proposed tax on investment
income threatens to wipe out whatever little margins are left for non-life
companies. In 08-09, these insurance companies had managed to stay in the black
on account of investment income. Last fiscal, the non-life industry
collectively made underwriting losses (amount of claims exceeding premium
income) of Rs 4,723 crore. But it managed to register profits due to investment
income of Rs. 5,806 crore. Part of this income came from interest and dividend
earnings but a significant portion was profit from sale of investments. “The
industry reported underwriting losses of Rs 4,723 crore in `08-09 that was
covered because of investment income. With the tax on investment income there
is no other way out but to raise rates” said SL Mohan, secretary general,
General Insurance Council — an association of non life insurance companies.
Changes in income tax announced in the budget this year which have been
reiterated in the new direct tax code (DTC) would mean that companies will have
to pay tax on profits from sale of investments. “The non-life industry is
treated like no other industry as it is not extended the benefit of capital
gains tax and will be taxed at the marginal rate of over 30% even as everyone
else including banks, investment funds and fund managers are eligible for
long-term capital gains. That is the inequity” said Bhargav Dasgupta, managing
director, ICICI Lombard General Insurance. Besides this the direct tax code
requires insurance companies to pay tax on investment income and also a minimum
alternate tax on 2% of their assets. Like life insurers the non-life insurance
industry also claims that the proposals wrongly include technical reserves, on
which policyholders have claims, as part of an insurance company’s own assets.
What is worse the DTC requires non-life companies to pay tax on notional gains
in value of their technical reserves. The general insurance industry has seen
its margins come under pressure in 08-09 as insurance rates fell due to
competition while at the same time investment income also dropped. – THE
ECONOMIC TIMES, NEW DELHI, SEPTEMBER 25, 2009