Budget should bring on par tax treatment of pension products of life insurance with similar products on other platforms

The upcoming Union Budget 2017-18 will be a momentous one in more than one ways. As the government enters second half of its appointed tenure, it would aim at capitalising on various significant reforms initiated in the first half, and use the budget to provide the required impetus for growth with an eye on 2019 general elections.

Secondly, this will be the first-ever budget to be presented on 1 February, a good one month early, reflecting the intent of the government to get the Finance Bill passed before close of current financial year, emphasising the focus on execution right from beginning of the next financial year. Third, for the first time Railway budget will be incorporated into the General Budget.

This budget is also unique owing to the fact that it is set in the backdrop of hugely significant domestic and international events.

Demonetisation is a landmark reform which in the long-term will transform the financial sector, and in the medium term will significantly boost financial savings, reduce inefficient cash in the system, and encourage efficient ways of financial transactions.

Secondly, it is likely that interest rates may be close to their bottom, as RBI held on to the rates in the last monetary policy review against market expectations of a cut, suggesting that the rates may gradually start inching up.

On the global front, election of Donald Trump is a major event, and India will be keenly observing the economic policies of his government, especially in areas like immigration, increase in government spending, thrust on infrastructure spending, coupled with expected reduction in taxes, and the resultant effect on fiscal deficit, etc. which are likely to have effects on the Indian economy and currency.

Given this backdrop, this budget will necessarily have to focus on the key themes of growth, consumption, efficiency through cost reduction, and improving tax to GDP ratio through better tax administration and tax compliance. Firstly, a renewed focus is expected to be placed on agricultural sector with a view to reviving agricultural growth and improving farm incomes.

The Prime Minister has recently spoken about the objective of doubling farmers’ income by 2022. Steps would have to be taken to ensure adequate flow of credit to the sector, strengthening procurement at support prices, irrigation technologies, creation of a national e-market for farm produce, apart from ensuring fair prices for the producer and other initiatives such as the crop insurance scheme launched in the last budget, which is expected to cover more than 50 percent of the farmers within the next couple of years.

In keeping with the vision of the government to achieve “minimum government and maximum governance”, we can expect steps to review the manpower and administrative costs of government departments, define qualification criteria for government servants in order to ensure better execution, reduce bureaucracy and improve ease of doing business, rationalize social welfare schemes and further emphasis on direct benefit transfer (DBT) program for distribution of subsidies.

The persistence of poverty and significant leakages in welfare schemes that aim to alleviate it has prompted to move towards a “universal basic income”. UBI may be evaluated in India for targeted delivery of subsidy on an Aadhar-based platform with a direct transfer model.

Effect of demonetisation on tax collections is expected to be positive in the short term due to scrutiny of cash deposits, and in the long term due to better tax compliance. Short term effects like decline in consumption spending can be offset by making more surplus available in the hands of individuals and corporates, by reducing tax rates and increasing tax exemption slabs. While steps have already been initiated to encourage a digital ecosystem (cashless or “less cash” transactions), the journey can be accelerated with further steps for prevention of creation of new black money and discouraging cash transactions say by imposing taxes.

Life Insurance industry

Life insurance industry plays a significant role in nation building. It is the most important channel of long-term savings of households. It is the second most preferred investment avenue of households next only to bank deposits – approximately 19 percent of net incremental household financial savings for FY16 went into life insurance funds. The industry is a significant contributor to infrastructure investments (more than Rs 3 lakh crore in FY16), which is growing each year. Insurance companies hold a significant part of government debt – as per public debt management report of the ministry of finance, insurance companies held 22.2 percent of outstanding government of India securities as of March 2016.

Some definite steps are required to be taken for development and growth of this industry, to make it more efficient, and to create parity with other similar products.

Presently insurance companies are required to invest at least 50 percent of the life fund in government securities, which is a considerably high threshold compared to SLR requirement of 20.75 percent for banks. The restriction should be relaxed with a view to improving fund performance and efficiency.

A separate limit of Rs 50,000 for tax deduction should be provided for life insurance premiums apart from the limit under Section 80C. This would incentivise households to channelise more long-term savings.

The condition that sum assured has to be at least ten times of annual premium in order for the proceeds to be exempt under Section 10(10D), needs to be done away with; the decision must be left to customers rather than enforcing high cover. Besides, Section 80D limit should be enhanced to Rs 50,000 to encourage medical insurance cover.

Tax treatment of pension products of life insurance companies should be at par with similar products offered on other platforms. Tax treatment should be based on nature and objective of the product rather than the platform, which will ensure a level playing field. Premium paid upto Rs 50,000 for a pension policy from a life insurance company should be treated at par with NPS by providing for an additional deduction under Section 80CCD(1B) and further additional deduction under Section 80CCC to the extent of 10 percent of salary.

Annuity received out of maturity of pension fund under the pension or annuity policy should be exempt from tax under Section 10(10A). Annuity purchased after maturity of pension policies of life insurance companies should be exempt from service tax.

Life insurance pension policy should be treated as a capital asset and only the gain should be taxed on maturity or surrender and not the entire amount received.

On a final note, the budget is expected to be reformist and development-oriented, and will focus on the achieving sustainable growth, encouraging long-term investments and creating an efficient digital ecosystem.



Insurance Bills Rise as Texters Crash Cars

When Travelers said in January that it was ready to increase prices for car insurance, Wall Street’s attitude was: “What took you so long?” Consumers may soon be wondering when the premium hikes will ever end.

The largest U.S. auto insurers have suffered from years of higher-than-expected claims, frustrating investors. Industrywide, companies have been paying $1.05 in costs for every $1 in premium revenue. A decade ago that figure was 95¢—meaning insurers came out a nickel ahead. Allstate and Berkshire Hathaway’s Geico unit have been raising prices since at least 2015, making Travelers one of the last big shoes to drop.

At an investor conference last year, Tom Wilson, Allstate’s chief executive officer, said rising costs were partly the result of the economy’s expansion. More people commuting to work—and driving to vacations—means more cars on the road and more accidents. Then there’s distracted driving: Allstate said in February there’s a “striking” correlation between the rise in smartphone use and crashes. All told, vehicle-related deaths rose 8 percent in the first nine months of 2016 from the same period in 2015.

Because of increased health-care costs, claims are costlier when accidents happen. And car features that are meant to minimize accidents, such as driver-assistance technology and cameras on the bumper, can add to repair bills. “Where a normal repair 10 or 15 years ago from an accident cost $1,500, now that same bumper with all the technology is $3,500,” says Derek Ross, president of Kulchin Ross Insurance Services, an insurance brokerage based in Tarzana, Calif. “The insurance companies are absorbing those real dollar claims while trying to figure out how much of this automation and technology is actually working to their benefit.”

The pace of premium increases has hit a 13-year high, according to data from the U.S. Department of Labor’s consumer price index. A number of state regulators say they’re concerned about the higher costs for drivers. California’s insurance commissioner created a low-cost insurance program last year for lower-income residents and pushed companies to explain why their costs are so high.

A January report from the U.S. Department of the Treasury says more than 18 million Americans live in a ZIP code where car insurance is unaffordable based on the median local income. “For the most part around this country, you need a car to be economically mobile,” says Doug Heller, an insurance expert at the Consumer Federation of America. “That premiums are rising becomes a real impediment to families’ finances and economic growth.”

Wall Street, on the other hand, has applauded the shift. “The industry needs to generate a reasonable rate of return,” says Barclays analyst Jay Gelb. Amit Kumar, an analyst at Macquarie Group, upgraded his recommendation on Travelers partly because of the decision to raise rates.

Still, just because insurers might like to collect higher premiums doesn’t mean consumers will sit still for them. According to the Zebra, which compares quotes for more than 200 insurance companies, premiums are $1,323 a year for a male with a good driving record, up from $1,194 in 2011. That’s a noticeable bill in the family budget. So there’s an incentive to shop around and change insurers.

It’s getting easier to do. Startups and venture capital investors are racing into the online insurance-shopping business. Mark Cuban is among investors backing the Zebra. CoverHound, which previously helped Google create a comparison website before it was closed last year, has raised more than $50 million for its own similar effort. “We are seeing more customers switch now on our site than ever before,” says Andrew Rose, the CEO of Compare.com, another company that helps customers find quotes online.

At the same time, startup insurers such as Metromile seek to provide cheaper options by allowing motorists to pay for coverage based on how much they drive. Customers put a wireless device in their car that measures mileage and shares it with the insurer.

Over the longer term, big insurers face deeper threats to their profitability. Morgan Stanley and Boston Consulting Group said in a recent report that the $200 billion global business could shrink 80 percent by 2040. Ride sharing services such as Uber may lead more people to skip buying a car, or maybe that second family car. Self-driving vehicles could reverse the rise in costly accidents but also force premiums lower. And the makers of navigation apps and connected cars, with direct access to a driver’s data, could emerge as competitors to traditional insurers.

“The watershed moment is sometime in the next decade,” says Rose of Compare.com. “When do you stop seeing rate increases and you start seeing rate decreases?” The companies that guess the next turn correctly—and move fast enough to cut rates and grab market share—will win the next cycle in the insurance business.

The bottom line: Big car insurers are raising premiums to return to profitability—but that’s made them vulnerable to new competitors.



Cancer: Financial Conduct Authority is concerned over discrimination by insurers, and no wonder


Amidst what seems like unrelenting bad news, the Financial Conduct Authority seems set upon doing something humane and worthwhile when it comes to the issue of cancer patients and insurance.

The regulator has identified a real problem: people who once had decent access to insurance products have started to encounter serious difficulties.

It would like to find out why that is.

That there is a pressing need for work in the area can be seen from what is contained in an earlier paper on the subject of financial exclusion.

In it, the example of Alison was highlighted. A cancer patient in her 70s, with a hip replacement, she wanted to take a cruise but found that securing insurance was going to end up costing as much as the trip itself. This was despite the fact that, while her condition was incurable, she was at the time in question about as healthy as any other 70-year-old could expect to be thanks to the treatments she was able to take. Her doctor confirmed this. It didn’t seem to matter.

She did exactly what the industry keeps telling people they should do. She sought its advice. That included calling a helpline operated by the British Insurance Brokers Association. At no point was she pointed to better deals that might have helped her.

On a subsequent occasion she tried to organise a trip for a family group, only to find that the problem was somehow extended to those travelling in the same party, simply because she was down as the ‘organiser’. This meant that they couldn’t secure their own insurance, independent of her.

And insurers wonder why they have such a bad name.

Part of the problem may be caused by the industry’s desire to push its customers online. If you don’t fall into the “ordinary person” category required by the tick box forms found on insurers’ websites, you’re out. It is possible that one of the consumer’s greatest allies – the price comparison website – has played a role there too.

The growing use of automated systems may serve to further exacerbate the problem in future years, which makes the watchdog’s work all the more timely.

Ideally, the study would extend beyond cancer. As someone with disabilities, I know from bitter personal experience how difficult insurance cover can be to obtain. However, the FCA tells me it is aware that there will be a read across to those of us with other conditions, and it intends for its work to benefit us too.

Well and good, because, as the regulator has pointed out, people are increasingly being told that the state isn’t going to look after them. They have to do it themselves. That being the case, there is a real problem if what is being offered by the market with that aim in mind fails large numbers of people. People who pose a relatively modest and calculable risk. People like Alison. People like me (and FYI I’ve never claimed off a travel insurance policy).

The only criticism I would level at the FCA is that its language is too conciliatory to the industry. It is along the lines of “we want to find out why insurers find it hard to provide cover to people with cancer”. I’d have asked why the industry thinks it’s ok to discriminate against people with cancer, and what measures could be taken to stop it.

But, given you would have thought that it would be the role of Government to solve on a problem like this, at least the FCA is there and doing something.

While ministers engage in the systematic trashing of the UK economy, I suppose we have to be thankful for small mercies.



Ironshore CEO Kelley Talks Goals Under Liberty Mutual

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Longtime Ironshore Inc. CEO Kevin Kelley said his company has a genuine shot at becoming a “premier” specialty property/casualty insurance company, both domestically and abroad, now that Liberty Mutual Insurance is its corporate parent.

“I am dead serious,” Kelley said. “We can build a premier specialty property/casualty insurer. By knowing and utilizing the resources of Liberty Mutual, which are extensive both from the insurance product side and distribution side, but just as importantly [on the technology side], what we want to do is build the premier specialty property/casualty insurer of tomorrow.”

Kelley’s comments came shortly after Liberty Mutual closed its $3 billion acquisition of Ironshore from China’s Fosun international. Liberty Mutual touted the move as creating a global specialty business with $6.5 billion in net written premium. The insurer said it will combine its existing Liberty International Underwriters U.S. business and Ironshore’s U.S. specialty business under the Ironshore brand. In doing so, the combined entity becomes the sixth-largest writer of excess and surplus lines in the United States in terms of 2016 direct written premium.

Sean Kelly, Ironshore president and CEO of Ironshore U.S., will lead the combined operation and report to Kelley. Kelley, in turn, who has been in charge of Ironshore since late 2008 (two years after its founding), remains in charge of Ironshore proper and now reports directly to Liberty Mutual Chairman and CEO David Long. Ironshore also keeps its corporate identity and management team.

The sale ended Ironshore’s short and unusual tenure as a division of Fosun, which spent $2.3 billion to acquire Ironshore in phases from 2015 through 2016, and at one point wanted to spin it off with an IPO. Fosun had accumulated major debt in a 20-year acquisition spree, but then delayed the Ironshore IPO after running into U.S. government national security concerns over how Fosun would operate Ironshore’s Wright & Co., which provides professional liability coverage to U.S. government employees including the Central Intelligence Agency.

Wright was a small part of Ironshore’s overall business, but in late 2016, Starr Companies agreed to acquire Wright.

Not long after, Liberty Mutual’s successful bid to buy Ironshore from Fosun became public.

Kelley declined to comment on Fosun’s ownership tenure, choosing instead to focus on Ironshore’s new corporate parent.

“What Liberty brings is not just a [strong] balance sheet, but it brings a much broader commercial business,” Kelley said. “They have a very robust standard multiline commercial business that, quite frankly, gives us greater access to clients and further access to a broadened distribution.”

Kelley added that those elements are key to competing successfully in the future.

“When you look at the environment of today and tomorrow, I think you need to offer a very broad and complete set of products and services to a client base,” Kelley said. “Through ownership from Liberty Mutual, we not only get access to their balance sheet but to their other commercial businesses.”

Ironshore Will Remain Relatively Autonomous

While Kelley will be reporting to Long, he noted that he and Ironshore will be fairly autonomous.

“We’re going to be given the freedom to run our business, and I look forward to working with my new colleagues in a mutually beneficial way,” Kelley said. “We’ve got a pretty good opportunity with sufficient operating freedom to get and build what we want to build.”

Kelley believes he can build a unique company that happens to have a corporate parent. He noted as evidence of this his tenure leading Lexington Insurance Company from 1987 through 2008, while American International Group just happened to be the corporate owner.

“I know how to build a company within a large company structure,” he said. “I would anticipate the same kind of operating freedom that I had under AIG and look forward to the opportunity to build something special.”


Ironshore CEO Kelley Talks Goals Under Liberty Mutual

What to check for when booking ski holiday insurance

Piste closed sign

Avoid taking a tumble on your winter sports insurance this winter – here, we guide you through the small-print pitfalls.

As the old saying goes, “the devil is in the detail” and it’s certainly true of insurance. At best, we might cast a quick eye over the general levels of cover but how many of us actually read the small print? Yet the conditions and exclusions which lurk in the policy we buy can cost us dear. Here are some questions to ask when choosing a winter sports policy before signing on the dotted line.

What should I check first?

The conditions governing cancellation and curtailment. If you’re ill, your costs should be covered but if you have to abandon your holiday because a dependent is ill (whether it’s the person you are planning to travel with or a close friend or relative at home), your claim could be refused.

Any conditions regarding cover for “ski pack”?

“Ski pack” is the term for pre-paid lessons, lift passes and equipment hire. If you are ill or injured and can’t use this, make sure you ask for a doctor’s certificate so you can prove your claim later.

When does piste closure mean “piste closure”?

If you can’t ski or snowboard due to lack of snow, too much snow, high winds or risk of avalanche you should be able to claim on insurance, but you’ll need to check your policy wording. You may find that a high percentage or all the ski lifts and schools have to be closed to qualify, or your tour operator may reserve the right to transfer you to an alternative resort which is miles away.

Some insurers waive this cover when a policy is bought within 14 days of departure as the conditions may already be predicted to be poor.

What about cover for lost or damaged equipment?

A range of get-outs may apply to this part of the policy. Cover could be waived while the equipment is in the care of an airline or even when you’re actually skiing. Unlocked skis left outside a mountain bar or restaurant, or skis left within view on a car roof rack are also unlikely to be covered.

What about off-piste?

Some policies exclude off-piste skiing and snowboarding entirely, some require policy-holder to be with a companion, and some require the companion to be a professionally-qualified guide. You also need to show that you followed the resort’s off-piste rules, taking sensible notice of local advice and weather.

How about the ski school slalom race at the end of the week?

Most specialist insurers will cover these fun races, but not all. Check before you take part. The same applies to terrain parks.

Surely I can rely on my cover if I injure myself on the slopes?

Well yes, you’d think so, but but all travel policies will contain exclusions relating to use of alcohol, so steer clear of over-indulging at lunchtime.

And après activities?

Tobogganing and ice-skating (on a public ice-rink) are usually covered but snowmobiling, dog-sledding and parapente may not be. Watch out for high excess charges on claims arising from “high risk” activities too.