Two Non-Life Insurance Psus Likely
The government is planning to reorganise the non-life insurance business. The first step will be to reduce the number of public sector undertakings that control the segment in the country from four to two.
The reason: two companies with higher capital bases will be better equipped to face competition in the liberalised insurance market.
The capital base of the four subsidiaries is at present only Rs 40 crore each, while the minimum capital fixed for a general insurance company by the Insurance Regulatory Development Authority (IRDA) is Rs 100 crore. Also, the four companies will have to comply with stiffer solvency margins as laid out in the IRDA Bill.
Government officials pointed out that the four PSUs_New India Assurance, National Insurance, Oriental Insurance and United India Insurance_were created after nationalisation in 1972 to foster competition in the segment.
"With the opening up of the sector, it is felt that four general insurance PSUs are not needed. Also, a couple of them are not strong by themselves. There is a plan to merge them into two firms, or perhaps even one," an official said.
The official said the General Insurance Corporation (GIC) would continue to be the holding company for the non-life PSUs.
However, industry sources said the GIC board was in favour of snapping equity ties with its four subsidiaries, in the event of GIC being made a national re-insurer.
"The majority on the board is of the view that GIC should not continue to be the holding company if it is made a national re-insurer. This may result in conflict of interests," the sources said.
The authority has made it clear that GIC cannot carry out any insurance business if it is made a national re-insurer. However, the officials said the government believed that there would not be any violation of rules if GIC continued to be the holding firm for the non-life PSUs. According to the GIC Act, the holding firm is supposed to be involved only in re-insurance.
Mutual Assurance
* The problem The four firms with a capital base of Rs 40 crore each are used to a monopoly situation. Now, they will have to comply with stiffer solvency margins laid out in the IRDA Bill.
* The move Merger New India Assurance, National Insurance, Oriental Insurance and United India Insurance into two firms to face private competition in the liberalised insurance market.
* The future The government plans to equip the PSUs with more capital. The firsm may get more autonomy on commercial ines or may be consolidated into even one company.
* The downside The proposed merger is unlikely to result in economies of scale due to lack of a proper exit policy.