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The government’s announcement in the Union Budget on Thursday to merge three state-owned general insurance companies — National Insurance, Oriental Insurance and United India Insurance — has caught the sector regulator Insurance Regulatory Development Authority of India (IRDAI) by surprise.
In the Budget for FY16, Finance Minister Arun Jaitley had announced plans to list the three companies on the bourses. Thursday’s announcement reverses the position.
The change in policy for the three companies, even as they were caught off guard, shows the level of discomfort within the government about their ability to take on the expanded load for insurance coverage in the economy with their current financial strength.
One of those responsibilities will be to provide the massive premium and claim settlement cover under the proposed universal health coverage plan announced in the Budget FY19.
In the pecking order of general insurance companies in India, New India Assurance is the runaway leader. While United India and National Insurance occupy the second and third slots, respectively, in terms of gross premium generated, Oriental has slipped behind ICICI Lombard to occupy the fifth place, according to the IRDAI data for up to December 2017.
These state-owned companies will have to take on the bulk of the business in the biggest takeaway from the Budget FY19. Their current market share of non-life business is just below 30 per cent. Yet none of these three companies is financially healthy to take on the role.
According to the standards set by the IRDAI, the companies have to maintain a solvency ratio of 1.5. The ratio measures to what extent an insurance company has capital to meet claims from all the business it has covered. But all the three companies have slipped below the prudent limit set by the watchdog. It is one of the reasons the three have not been able to approach the markets for public listing. A lower-than-prescribed ratio means the company should not underwrite fresh business.
R Chandrasekharan, secretary general of the General Insurance Council, the umbrella body of the sector, said the move would help consolidation in the sector. “The market has grown big with lots of entities. It is not necessary for the government companies to compete among themselves to guide the market. Merger and subsequent listing would help”.
National Insurance has just returned to a higher-than-prescribed level in FY17. The only exception is New India (set up by Tata group till nationalisation in 1972). It is the outlier among the state-owned general insurance companies, with a solvency ratio of 2.22. But it too has not caught the market’s attention after listing. While its shares opened at Rs 667.95 on Friday, the price slipped by over 2 per cent since then on the NSE to close at Rs 653.05.
An official said the sustained weakness of these companies made the finance ministry change its stance about the appropriate policy for them to adopt. The plans for listing have consequently been dropped. The ministry was also quite hamstrung on the level of consultations it could hold with the regulator in the run-up to the Budget on the subject. T S Vijayan, chairman of the IRDAI, retires in February, and the government is expected to announce his successor soon.
Vijayan does not enjoy the best of equations with the government and has been sidelined from key decisions. It is understood that the plans for universal health insurance coverage did not go through his office. The finance ministry has in any case kept the operation of the mega social insurance schemes — Pradhan Mantri Fasal Bima Yojana, Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Suraksha Bima Yojana or the Rashtriya Swasthya Bima Yojana — out of the ambit of regulations of the IRDAI.
In FY 17, the general insurers have collected total premium of Rs 1.27 trillion against Rs 964 billion in FY16. The premium of the government-mandated insurance schemes is about a quarter of this pie. So, the level of exclusion for the sector regulator is unprecedented for any other sector in India. Chairmen of two of the state-owned companies have said they were not in loop about the health insurance schemes. No representatives from the general insurance company were called for the pre-Budget meeting of the finance minister and the banks and financial institutions held in December, 2017.
One of the biggest challenge for the three companies in the merger process would be to get their IT systems to harmonise with each other. Unlike the State Bank of India’s associate banks, which had long ago moved to the same IT platform, these companies have entirely different systems. Work on getting those in the three insurance companies to sync with each other will have to predate other aspects of integration.