GST 2.0: Insurers cut payouts to distributors

Mumbai: Insurers are cutting commissions to distributors, including platforms such as PB Fintech, after the government scrapped Goods and Services Tax (GST) on individual policies while withdrawing input tax credit (ITC). From October 1, companies such as Niva Bupa, Care Health and ICICI Lombard began treating commissions as GST-inclusive, effectively reducing payouts by 18%. A ₹1,000 commission is now worth ₹847, according to letters sent to distributors.

The move hits intermediaries in retail space dealing with individual life and health insurance products. Health insurance where commissions account for 15-20% of the ₹40,000-50,000 crore retail health insurance market, implying a potential ₹1,800 crore annual loss. Insurers are passing on the entire GST benefit to policyholders but offsetting the ITC loss by cutting distributor payouts.

Life insurers face a similar squeeze. The industry paid about ₹24,000 crore in GST in FY24, offset by ₹ 14,000 crore of ITC. With credits no longer available, the new two-rate system leaves them facing a ₹15,000 crore sector-wide hit, part of which will show up in company profit and loss accounts and embedded values. Despite the exemption, customers may not see a meaningful drop in premiums as insurers adjust pricing to recoup lost credits, analysts said.

"The government has very clearly asked insurers not to pass on any hit to customers," said a broker familiar with the discussions. "They have instead passed it on to distributors, and now we need to rethink our product mix, perhaps focusing more on group policies to limit the damage."

Previously, life policies attracted multiple GST rates- 18% on term and ULIPs, 4.5% on first-year traditional plans, and 2.25% on renewals. Insurers could claim ITC of 2.2-2.7%, cushioning margins. With that relief now gone, distributors of both life and health products are being forced to absorb the adjustment.

The government had exempted individual life and health insurance from GST effective September 22 to expand penetration and ease consumer costs. But with input credits gone, GST on distributor commissions, technology and other non-salary expenses now flows straight into insurers' profit and loss accounts.

General insurers had lobbied the finance ministry for relief on distributor commissions, arguing that since commissions are embedded in policy premiums, they should be exempt like reinsurance payouts.

With no relief forthcoming, insurers are now restructuring their focus on cost control by passing on the hit to distributors to manage the fallout.