Niva Bupa Health Insurance Co. Ltd faces Hobson’s choice after the goods and services tax (GST) rate changes on insurance: to remain competitive without raising premiums and sacrifice profit margin, or become uncompetitive by raising premiums and protect profit margin.
Before delving into why Niva is the casualty of the revised GST rates, it is important to understand a few points.
Only individual health insurance (not group health) has been exempted from GST, with other types of insurance like vehicle insurance remaining taxable. So, general insurers will still be able to offset the GST on commission paid to agents and other expenses for individual health insurance policies against their GST liability on premium collected on all other general insurance policies. This is called the input tax credit (ITC).
However, standalone health insurance (Sahi) companies may not be able to fully utilize ITC for GST paid on expenses as they have to collect GST only on premium from group health insurance policies now. The two listed Sahi companies in India are Star Health and Allied Insurance Co. Ltd and Niva Bupa.
For FY25, Star’s gross premium income is ₹16,781 crore and Niva’s is ₹6,762 crore. Does Star’s higher gross premium income mean its potential hit due to the GST changes is larger? The answer is no.
Enter two more factors: expenses of management (EoM) ratio and re-insurance ceded ratio (the risk transferred to re-insurance companies). On both, GST is paid by the health insurance company, making it eligible for ITC. Despite its smaller size, Niva’s ITC is higher as its EoM is higher at 39% and re-insurance ceded is 22% vis-à-vis Star Heath’s 31% and 7%, respectively.
As per Kotak Institutional Equities, the disallowed ITC for Niva is estimated at ₹193 crore based on FY25 versus Star’s ₹156 crore. Since Niva is likely to lose more on ITC, its profit margin will suffer more if it doesn’t take price hikes in base premium. Kotak estimates Niva will need a price hike of 4.4% in base insurance premiums versus just 1% for Star.
Thus, the abolition of GST may spur demand for individual health insurance premiums for all insurance companies that slowed down in FY25, but the impact on profitability varies substantially. Investors will be better off watching Niva’s response before taking a plunge.
