The premium rates for motor and health insurance policies are likely to go up following the recent clarification from the finance minister that confirms that general insurance companies will now have to pay tax on investment income. The directive could restrict most insurers’ ability to do business and hence force them to increase premium rates.

“The budget this year clarified that general insurance companies will have to pay tax on profits made on the sale of equities. Profits accrued from the sale of equities are quite a significant portion and thus taxing them can put pressure on our income. This might get reflected in the premium rates as well,” said Oriental Insurance CMD M Ramadoss.

Until 2007, investment gains were treated as core part of the operations of general insurance companies. However, in FY 2008, gains on equity investments were brought under the ambit of the taxman and companies had to pay arrears for previous years. The directive hit PSU general insurers harder.

Since the general insurance space was deregulated in phases starting 2007, fierce competition forced companies to offer highly discounted prices — as high as 80 per cent in case of fire and engineering. In motor, the companies doled out as much as 40-50 per cent discount, according to market experts.

With underwriting losses already eating into the reserves of the companies, taxation on the investment income is not being welcomed by the general insurance companies. This, therefore, could well force general insurers to pass on the taxation burden on the consumers in the form of higher premium.