Fringe benefit jitters hit group insurance

Companies wait for clarity on the impact of fringe benefit tax & superannuation funds.

The fringe benefit tax has already taken a toll on Corporate India. The number of group insurance policies sold in February and March this year has fallen as a result of companies waiting for clarity on the impact the fringe benefit tax (FBT) and superannuation funds will have on their bottom lines, before committing themselves to offering these employee benefits.

"Many corporate clients have deferred their decision to purchase group covers until the Finance Bill pans out in terms of the impact of the fringe benefit tax and superannuation funds," said Anjana Grewal, vice-president, Birla SunLife Insurance Company.

It took seven to eight months for companies to decide on opting for these employee benefits, she said, adding, "A couple of our deals have been deferred."

According to the latest data released by the Insurance Regulatory and Development Authority (IRDA), growth in the number of overall policies sold has dipped by 9 per cent to 187,285 crore policies during 2004-05 till February 28, 2005.

Both Bajaj Allianz and Tata AIG saw a 100 per cent fall in the number of group single-premium policies they sold. SBI Life and ICICI Prudential Life saw falls of 73 per cent and 61 per cent, respectively, in the number of group single premium policies sold.

So employees' free medical and free life insurance cover as well as future pensions could go for a toss. Corporate India has practically stopped buying group insurance policies for employees thanks to the Budget announcement on taxing fringe benefits.

"If the burden of taxation is shifted to employers, corporate India will need to ensure expenses are not unnecessarily impacted on account of the fringe benefit tax," said Nikhil Bhatia, partner, BSR & Co, KPMG.

Fierce competition was putting pressure on organisations to reduce costs and remunerate employees in a tax efficient manner, he added.

This phenomenon is not unique to India. In the US, following the house of Congress passing section 125 enabling employees to pay their costs for certain benefits on a pre-tax basis, many employers reduced the cost burden when offering employee benefits.

On group non-single premium plans, some insurers have done relatively better when it comes to selling pure term policies against liabilities like home loans, car loans and the like.

SBI Life CEO S Krishnamurthy told Business Standard: "We doing very well on this group business as banks focus on retail lending and cross-sell term covers with these loans."

The number of group policies sold under this umbrella rose by over 750 per cent in 2004-2005 over the preceding year for SBI Life, which has a 12 per cent market share, second to the Life Insurance Corporation of India's 63.65 per cent. However, Krishnamurthy acknowledged that FBT would have an impact on group business.