From merger, govt now looks to de-merge 3 PSU insurers then look for strategic sale

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SME Times News Bureau | 24 Jun, 2019
With its plans on consolidation in the insurance sector hitting several hurdles, the government has started exploring different options including de-merging three of its big-size general insurance companies into smaller units and then look at strategic sale of few operations to the private sector.

The Finance Ministry earlier considered merging three public sector general insurance firms -- National Insurance Company, United India Insurance Company and Oriental India Insurance Company barring New India Assurance -- to create one large and strong entity.

Official sources said that de-merger plan has now been brought to the table after a series of stakeholders meetings and this has now become one of the options before the Finance Ministry to make state-owned entities more focused on the task of increasing insurance penetration in the country.

"The idea to merge PSU insurers is fraught with problems as one giant entity would be difficult to administer and manage. Moreover, this might lead to branch rationalization/closure and major job losses in the sector," said an official source.

"De-merger of big-size PSUs into smaller units, on the other hand, would enable ease in administration and further increase in reach of these to the masses with improved and more effective focus and management," the source added.

Post de-merger, a fresh assessment could be made about privatising some of the insurance operations by offering them to strategic investors. It is believed that strategic sale of smaller units may be easier to undertake and can get better valuations.

Moreover, smaller units would also help to scale up regional branches and improve insurance penetration.

The government had announced merger of three public sector general insurance firms in the Budget 2018. The move was billed as the biggest-ever merger in the insurance sector with the new entity having a valuation exceeding Rs 1 lakh crore. It intended to complete the exercise in FY19 itself.

But since then, the merger proposal has moved at a snail's pace and has encountered several hurdles. Earlier this year the merger plan hit a roadblock when the Department of Financial Services (DFS), which oversees the operations of state-owned insurance firms, wrote to DIPAM not to proceed with the merger plan in haste and examine the proposal afresh and untangle complex operational issues first.

One of the issues in merger is also poor financial health of two out of three insurance entities that continues to remain in losses. In the quarter ended September last year, the three insurers had posted a combined loss of around Rs 1,800 crore. Moreover, a few of the insurance firms have also lost market share. In fact, PSUs insurers' market share has fallen from a level of 56 per cent in FY13 to 51 per cent in FY18.

As part of strengthening exercise, government has also directed the firms to undertake monetising their assets including real estate to raise revenues. It is expected that capital support to the tune of Rs 4,000 may also come from the Centre for these insurance firms.

The general insurance market in the country comprises 27 companies including the four major PSU entities, 23 private players and six are stand alone health insurers.

The insurance density in India (ratio of premium to total population) is $73 compared with average world insurance density of $650.

Insurance penetration in India is at 3.69 per cent compared with world average of 6.13 per cent. The penetration in general insurance sector is still less than 1 per cent.