Budget 2026: SBI Research Flags Tax And Policy Changes To Improve Insurance Coverage

SBI Research has submitted a list of recommendations aimed at strengthening the insurance sector as the Union Budget 2026 draws closer. The proposals are based on the following: enhancing insurance penetration, building trust among policyholders, and reducing long-term dangers. These suggestions come at a time when insurance coverage has become sluggish, and the protection gap has widened, even as policymakers continue to advocate for the goal of insurance access for all by the year 2047.

In its Prelude to Union Budget 2026-27 report, SBI Research spoke about the importance of policy support, especially by way of taxes and regulation reforms, to facilitate broader adoption of insurance products.

Separate Tax Deductions For Term And Health Insurance

One of the important recommendations is tax incentives. SBI Research has suggested a separate taxation for term life insurance and health insurance as an additional deduction, like the extra one provided for investments in the NPS.

As per the report, a dedicated deduction of 25,000 to 50,000 could lead to a much better insurance uptake. The deduction should be available under the old as well as the new tax regimes so as to make it more widely applicable. The report also recommended extending Section 80D benefits to include the new tax regime to help eliminate a significant obstacle for taxpayers who have moved away from the old regime.

The lack of insurance-related deductions under the new tax regime has made it less attractive for many individuals to buy or renew insurance policies. Addressing this gap can help to improve coverage levels over time.

Claims Settlement And Consumer Trust

The report also pointed to increasing stress in the health insurance segment, especially in the area of claims settlement. According to SBI Research, nearly 69 per cent of the insurance-related complaints in FY25 were related to claims. These included delays in settlement, partial payment, and outright rejection of claims.

Such issues have increased the lack of confidence among consumers and made policyholders more wary of purchasing or renewing health insurance. SBI Research said that better claims management is important to the long-term stability of the sector. The report called for increased transparency, faster processing, and fair treatment of policyholders in order to regain the trust.

Digitisation And Bancassurance Channels

To improve the insurance penetration, SBI Research emphasised the role of digitisation and bancassurance. Banks have wide physical networks and established customer relationships, which can be used to distribute insurance products more effectively, especially in underserved and rural areas.

The report also noted that digital platforms can help to reduce distribution costs, ease the policy purchase process, and provide a better customer experience. For first-time buyers, easier access and clearer information could play an important role in encouraging adoption.

Disaster Risk Coverage And Protection Gap

Another major area highlighted in the report is disaster risk coverage. The report estimated that approximately 93 per cent of the losses due to natural disasters between 1991 and 2025 were left uninsured. This says pointing to a large protection gap for households and businesses.

With climate-related events becoming more common, the establishment of a public and private disaster risk insurance pool was recommended, the report said. Such a structure could help to spread the risks, to offer quicker financial support after disasters, and reduce the financial burden on governments.

Risk-Based Capital Framework

On the regulatory side, the think tank SBI Research suggested a shift in approach to insurers, towards a risk-based capital framework. The existing solvency system is based largely on formulas and may not be completely representative of the actual risks faced by insurance companies.

A risk-based approach could help make the capital more efficient and the sector more resilient to financial shocks.

SBI Research added that the insurance penetration rate fell to around 3.7 per cent in FY25 from 4.2 per cent in FY22. The report said there is a need for a combination of tax incentives, regulatory reforms, improved claims management, and risk coverage mechanisms to reverse this trend and improve the insurance ecosystem.