Will GST removal revive insurance stocks, lead to valuation rerating, and propel growth?

The past year has been a tale of contrasts for India’s insurance stocks. While some stocks held their ground, others found themselves weighed down by sustained headwinds. For instance, HDFC Life and SBI Life managed to stay afloat, delivering essentially flat but steady returns, even though volatility remained during the mid-year period.

Conversely, ICICI Prudential and Lombard slipped into the negative territory, reflecting weaker sentiment and concerns about growth. Now, with the possible removal of GST on insurance premiums back on the table, investors are wondering if this long-awaited reform could bring fresh life to the sector and set these stocks on a stronger growth path.

Narender Singh, smallcase manager and founder of Growth Investing, says, "The Indian insurance market is on a strong growth trajectory. GST rationalisation can be a catalyst, acting as a powerful tailwind for a market already driven by favourable demographics, rising incomes, and a growing need for financial security." 

In his opinion, a GST exemption would likely lead to a surge in health insurance sales, benefitting players with strong health portfolios, such as Star Health, HDFC ERGO, and ICICI Lombard.

The market size as of FY24 was around $85-90 billion in terms of gross written premiums. "Projections are roughly $250 billion by 2030, with a CAGR of around 8-10% in nominal terms. By 2035, the market might reach $800 billion, positioning India as one of the largest insurance markets globally," says Narender Singh.

Paramdeep Singh, a financial services veteran across insurance companies like GE Money and SBI Life, believes the GST exemption will improve affordability and nudge more customers into the insurance net. “But I’d temper expectations. Valuations won’t rerate because of a tax cut. The real upside lies in whether this leads to deeper penetration and sustained earnings growth."

Currently, India’s insurance market is in a nascent stage with a low penetration rate. "India's total insurance penetration (premiums as a percentage of GDP) stood at 3.7% in FY24, with life insurance penetration at 2.8% and non-life insurance at 0.9%,” the Insurance Regulatory and Development Authority of India (Irdai) annual report states.

Jignesh Ghelani, partner, Dhruva Advisors, says, "If GST is entirely removed or significantly reduced, insurance penetration could increase by 0.5–1% over 3–5 years, depending on how aggressively insurers and intermediaries promote more affordable products. The impact will be more substantial in health insurance, where premiums are fully taxed and penetration is particularly low.” However, other factors such as financial literacy, product innovation, and digital access also play a significant role.

“With the (proposed) GST cut making insurance more affordable, the industry will see a shift from a 'protection deficit' (the gap between what people need and what they have) to a 'protection fulfilment’ phase," Narender Singh adds.

According to experts, it has also been observed that the per capita premium (insurance density) has continued to rise, indicating that those who are insured are purchasing more coverage. "India's per capita GDP has shown consistent growth from $1,554 in 2014 to around $2,481 in 2023, a clear indicator of rising incomes and greater disposable income for financial products like insurance," Narender Singh says.

When compared to medical costs, India has faced a persistent headwind for consumers, with medical inflation outpacing general inflation. For instance, in 2024, the average rise in health insurance premiums was between 15% and 20%, driven by rising healthcare costs.

Narender Singh says the gap between the current market size and the projected 2030 size highlights a significant headroom for growth. The projected increase from around $90 billion to $250 billion in only six years is a testament to the strong macroeconomic tailwinds in India. "The GST rationalisation, if implemented as a 'zero-rated' reform, would act as a powerful catalyst for this projected growth. By making premiums more affordable, it would directly accelerate the process of increasing insurance penetration and density," he adds.

However, Paramdeep Singh says, "Most insurers already trade at rich multiples. Any meaningful rerating will depend on fundamentals, such as growth and profitability, rather than the GST move alone."

As the market size and profitability increase, foreign investors, who have already demonstrated interest with the rise in the FDI limit to 74%, will likely allocate more capital, given that the government has now hiked the FDI limit to 100% in the insurance sector. This, combined with the government's initiative of 'Insurance for All by 2047' and GST reforms, can promote a fair environment for both domestic and foreign investors.

But Paramdeep Singh is cautious. "Expect foreign investors to take notice. Real allocations will follow execution—scale, margin discipline, and consistent performance matter more than policy headlines."

In short, the GST relief could offer a welcome boost, but the sector’s long-term prospects will depend on how effectively insurers drive growth, technology, and customer trust.