GST cut on insurance may trim medical inflation but won’t shift consumer mindset: Debashish Banerjee, Partner, Deloitte

Debashish Banerjee

While the GST relief on individual life and health insurance is welcome, it may not significantly change consumer mindsets and could even have a marginally negative effect, said Debashish Banerjee, Partner at Deloitte India.

In a conversation with Moneycontrol, Banerjee explained, “The real barrier is not price alone, it’s trust. Many Indians are skeptical about whether insurers will actually support them when they need it most. So, even if the cost comes down a little because of GST relief, that may not make people more confident in insurance.”

He added, however, that the GST cut could offer some near-term relief by easing medical inflation, bringing it down to around 10 percent from the current 14 percent, a level that has largely persisted since the Covid period.

Edited excerpts:

Do you think the increase in volumes will offset the input tax credit burden companies have to bear?

We’re all hopeful, and I use the word hopeful deliberately, because while optimism is important, there are still major challenges holding back the Indian insurance industry. These challenges are why penetration levels haven’t reached where we’d like them to be. One of the biggest issues, in my view, is trust. Generally speaking, the Indian consumer mindset is marked by lower levels of trust. Whether it’s trusting the government, agencies, or companies to do the right thing, there has always been a question mark. Insurance companies face the same problem. Removing GST by itself won’t solve this trust issue. That’s why I think GST reduction alone may not change consumer mindset in a big way, and it might even play slightly negative. The second big challenge is products. We need more customised and personalised products that can truly cater to underpenetrated and non-penetrated segments. Right now, we have about 60–70 insurers, growing by five or six each year, compared to mature markets like the US which has about 34–35 crore people but close to 7,000 insurance companies. That means a third of India’s population is being served by 100 times more companies. Unless that level of maturity develops here, we won’t see the shift we want. The good news is that with 100 percent FDI allowed, many new players—from both overseas and within India, including NBFCs, microfinance institutions, and banks, are entering the underpenetrated markets with product differentiation as their USP.

Since you mentioned FDI, let me ask you, although 100 percent FDI has been announced, we don’t see many companies even going up to 74 percent or 75 percent (from the earlier 49 percent). Many are still way below that level. Why do you think that is?

Our view is that there are two key gains. Moving from 49 percent to 74 percent gives controlling power. Many global insurance companies are control-sensitive. Until they have majority control, they don’t feel motivated to invest significantly. And for them, the amount they invest in India is small compared to their global balance sheets, and it doesn’t even register as material. Meanwhile, big Indian players were reluctant to dilute. They knew this is a growth market, they had the capital, and over two decades they had built know-how. Why would they give away shares in a growing market? That’s why you’ve seen some foreign partners exiting lately because they couldn’t secure enough control. Now, with 100 percent FDI, the dynamics may change. At 74 percent, you still had to partner and “marry” a local company, which wasn’t always easy given differences in professional standards and corporate culture. Many Western firms view India and China as lower on ethical and professional benchmarks compared to their own. That made partnerships challenging. So, 100 percent FDI is attractive because it allows foreign players to enter directly. But even then, they’ll need strong local partners for distribution. That’s the debate happening in boardrooms today: should they come in at 74 percent or go all the way to 100 percent, and if so, with what kind of partnership structure?

There’s been a lot of discussion on composite licensing. The Insurance Amendment Act was supposed to introduce it in the monsoon session, now possibly the winter session. Do you think it will be introduced?

Yes, I think it will. We were disappointed it wasn’t tabled during the Budget or monsoon session, but the anticipation is strong for winter. Some companies are already proactively preparing for it, with board-level discussions and detailed plans. Of course, there is resistance from large players who already operate both life and general businesses, as composite licensing could make those arms direct competitors. That’s a valid concern. But there are multiple possible scenarios. First is direct competition when the life and general insurance arms will compete with each other, but that seems quite unlikely in my view. A second scenario would be a possible merger, when the two arms merge under one management team, saving costs and expanding portfolios. The third possible scenario is divestment, when a group may sell one of the arms that isn’t performing well, while retaining and expanding the stronger one. The right choice will depend on parent company boards, not just the individual insurance arms.

Alongside composite licensing, we’ve heard that IRDAI and the councils are also discussing allowing mono-line insurers, for example, a company focusing only on pet insurance or only on fire insurance in one region. Are such discussions happening?

Yes, those discussions are happening. New companies, especially Indian brands, NBFCs, and others, are actively exploring underpenetrated areas and product innovations. It’s bound to happen because that’s the natural trajectory of a maturing market. Globally, specialised insurers are common, and there’s no reason India won’t move in the same direction as it matures.

Let’s move to health insurance. There’s talk of a potential regulator for the healthcare industry, but it’s complicated because healthcare comes under both state and central jurisdictions. Meanwhile, we’ve seen issues between hospitals and standalone health insurers in the recent past. How do you view the current health insurance scenario?

Health insurance is at the center of many of the trust issues I mentioned earlier. Policyholders often face exclusions, non-standard products, and disputes just when they need cover the most. TPAs add another layer of complexity. And frankly, the healthcare ecosystem itself, including hospitals, doctors, and pharma, has been plagued with fraud, fake doctors, and unethical practices. India also lacks foundational systems like electronic health records (EHRs), which makes regulation harder. Fixing this requires a bold, foundational step from the government, something akin to a major constitutional move. Piecemeal fixes won’t work. We need end-to-end reforms, covering data systems, corrupt practices, standardisation of charges, insurer-hospital relationships, and customer treatment. That said, the market has grown significantly, especially after COVID. Growth has been in double digits, and we’ve crossed the one lakh crore mark. Mandatory group health covers and rules for motor insurance have also helped. But sustainability remains a challenge due to rising medical inflation. The GST may help bring medical inflation closer to global averages, to around 10 per cent. If that happens, it would ease pricing pressures in the short term. But the bigger need is to standardise practices, eliminate unnecessary exclusions, and ensure fairness to policyholders. Transparency and standardisation would go a long way in restoring confidence.

So you believe a bold reform, rather than incremental fixes, is the way forward for healthcare regulation?

Yes, absolutely. Incremental “band-aids” won’t solve deep-rooted issues. A bold, comprehensive reform, covering foundational data, pricing, ethics, and fraud prevention, is essential to make healthcare and health insurance sustainable and trustworthy in India.