Awareness, affordability, and attractiveness: Insurance sector's budget wishlist

The Union budget 2025 has provided a good opportunity to consider measures that can further support the insurance sector, which is fundamental to fostering a secure and resilient economy, supporting both individual and collective financial well-being.

The Insurance Regulatory and Development Authority of India’s (Irdai) vision of ‘Insurance for all by 2047’ aligns closely with India’s broader ambition of becoming a developed economy within a similar timeframe. Achieving this vision requires effort to address several priorities for the insurance sector.

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This wishlist focuses on three key areas that merit attention and action: improving public awareness, enhancing the affordability of basic insurance products, especially for more vulnerable segments, and increasing the attractiveness of insurance to drive penetration for basic coverages.

Increasing Awareness

Allocating budgetary support for initiatives aimed at increasing public awareness and understanding of insurance products and their benefits is imperative.

Despite ongoing efforts by the regulator and government, awareness about insurance remains limited, particularly among the financially-weaker sections, tier-3 and tier-4 towns and rural areas. These segments, arguably the most in need of insurance cover, often lack adequate knowledge about available products and their advantages.

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Perhaps, a parallel can be drawn with the mutual funds sector, where awareness campaigns have significantly contributed to the sector’s growth in India. Similar initiatives focused on insurance could drive wider adoption of insurance products in the country.

Enhancing Affordability

Reducing the Goods and Services Tax (GST) on insurance policies down to the lowest slab, especially retail, health and micro-insurance, is essential to lowering barriers to entry and improving accessibility. Health insurance, recognized as a crucial tool to ensure the financial protection and access to quality healthcare for the masses, remains underpenetrated, despite existing tax incentives under Section 80D of the Income Tax Act. Lowering the GST on health and micro-insurance plans may provide a much-needed additional push for adoption, particularly among lower income groups.

While insurance companies must continue to innovate and create products for different segments, measures such as a GST reduction can serve as a ‘jump-start’ to accelerate adoption until the market achieves its own momentum.

Improving Attractiveness

Introducing a separate tax deduction category for life insurance and other basic insurance products such as home insurance would significantly enhance their appeal. With the increasing frequency and intensity of natural disasters in India, including floods and urban flooding, there is a greater need for home insurance. However, low awareness and lower perceived value of such a cover has hindered its uptake. A dedicated tax deduction, akin to the Section 80D benefit for health insurance, could help push adoption.

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Similarly, a separate deduction category for life insurance products, especially term life and pension plans, would boost the penetration of these essential coverages in India. Additionally, offering tax relief on annuity income would promote retirement planning and encourage investments in pension products. This may even help redirect household savings from traditional assets like gold into pension funds, aiding long-term financial security.

Challenges and Considerations

Many of these proposed measures will rely on the continuation of the old tax regime, which could conflict with the government’s broader agenda to streamline and simplify the tax system. However, these initiatives may be a necessary trade-off to boost insurance awareness and adoption, which in turn can lead to a virtuous cycle of growth and create a resilient economy.

The insurance sector has a critical role to play in India’s journey towards becoming a developed economy. By focusing on awareness, affordability, and attractiveness, the Union budget 2025 can provide the necessary support to accelerate growth in insurance penetration. Such measures will not only protect vulnerable populations but also strengthen the financial resilience of the economy.

Bhavik Hathi and Shubhra Goel are managing directors with Alvarez and Marsal.