The merger of three state-owned insurance companies – United India Insurance (UII), National Insurance Company (NIC) and Oriental Insurance Company (OIC), proposed in this year’s budget – to create the largest general insurance company in the country is likely to lead to 10,000-15,000 staff being made redundant and result in savings of over Rs 3,000 crore annually, according to insurance officials.
These three companies have faced difficulties in maintaining their required solvency ratios due to huge underwriting losses and other lapses in recent years. Four PSU general insurers were created in the 1970s to provide competition in an environment marked by government monopoly in the insurance sector which was opened up much later in the 1990s.
“With liberalisation and opening up of the market to private players, unhealthy competition among the four has resulted in the four companies rapidly going down in terms of profitability and solvency. Perhaps two is better than four indulging in unhealthy competition,” said K K Srinivasan, former member, Insurance Regulatory and Development Authority of India.
The government has indicated that the merger and listing of the merged entity, which will be the largest general insurer in the country, is likely before the close of the next financial year.
With unions of these companies favouring merger, it looks like the three-way merger, unlike in the banking sector, may be a smooth affair. “More than physical merger, emotional integration of the companies is more important to achieve the desired results,” said the chairman and managing director (CMD) of a public sector insurance company, who did not want to be named.
The regulations of the insurance regulator prescribe a solvency ratio of 1.5 per cent for each of the general insurers which operate in the country. All the three companies are currently taking a number of corrective measures to reduce their underwriting losses and improve solvency ratios. NIC had borrowed Rs 800 crore to gain back its solvency ratio, while UII has just raised Rs 900 crore to improve its solvency ratio. Earlier, NIC, which had planned an initial public offering (IPO) during the current financial year, had postponed the exercise to the next fiscal.
While these insurers each have close to 800-900 branches, and around 15,000 employees and Rs 30,000 crore of assets, it’s not clear what they will do with the excess staff.
M N Sarma, CMD, UII, said: “Cut-throat competition among state-run general insurance will now come to an end. The cost of operations will come down. As of now, all the three companies put together have got 90 regional offices which will now come down to 30 after the merger. The requirement of staff will also come down and thus there may be 10,000-15,000 excess staff out of nearly 45,000 staff currently working in the industry.”
At the end of March 2017, three general insurers had a total premium income of Rs 39,000 crore and a market share of 32 per cent in the domestic general insurance markets. The three companies, among themselves, have some 1,200 divisional offices (DOs) with each DO costing around Rs 5 crore annually. “If the number of DOs is rationalised and some shifted to unrepresented areas and the total number reduced to around 600, the saving in cost is around Rs 3,000 crore annually. The huge saving in cost alone will turn the entity into a profitable one, provided the business momentum is maintained,” Srinivasan said.
G Srinivasan, CMD of New India Assurance, said: “Merger is always good, but it has to be properly managed. It requires a merger of people process and IT. The government has weighed the pros and coins and then only taken a call. It can be done in a proper manner. There is a need for bigger insurance companies in the market, rather than smaller companies.”
The huge savings in cost will come only after the merger is implemented. Speed and efficiency will thus be crucial. “There will be administrative issues and policyholder servicing issues to be tackled. For example, the IT platforms of the three companies are not the same. Hence choosing a robust platform among the existing three and quickly switching to one becomes critical,” K K Srinivasan said.
Sakate Khaitan, senior partner, Khaitan Legal Associates, said: “The move will also help the government take better control of its general insurance companies in terms of administration and realising much better value at the time of listing. This merger is likely to have the effect of reduced competition and leading to premiums firming up.”
The success of the merger will depend on how it’s done. “The merger will result in the making of a stronger company with higher enterprise value. It will create a good synergy. However, it depends on speed on pace and how long it will take to complete the process,” said K Sanath Kumar, CMD, NIC.
Alice Vaidyan, CMD, GIC Re, said: “It’s the implementation which will be the key to reaping the benefits of the proposal.”
Pushan Mahapatra, managing director & chief executive officer, SBI General Insurance, said: “The merged entity and its subsequent listing could lead to improved operational efficiencies, adoption of suitable risk-based pricing model while looking at a sustained growth rate, positively impacting both the insurance sector and the customer in the long term.”
Further, this would encourage domestic and foreign investors to positively review their investment decisions in the sector. The impact of the merger and listing, on the end consumers, would be visible only 5-6 quarters after the merger. (Indian Express)
