More capital for state-owned insurance companies on way

NEW DELHI : The government may infuse 4,000-5,000 crore in three loss-making, state-owned general insurers after the budget to help them meet regulatory requirements in preparation for planned listing and privatisation. According to two persons privy to the development, the capital provision would be made in the current year’s budget for which Parliamentary approval is expected to be taken through the last supplementary demand for grants for FY23 later in March. The government had already enhanced the authorised capital keeping further fund infusion in mind. The budget may also provide token capital for insurance companies that would be validated only after fresh requirement is assessed post the restructuring of the general insurance companies, one of the two people said. 

The capital infusion would help improve the financial health of the three firms—National Insurance Company Limited, Oriental Insurance Company Limited and United India Insurance Company. It will also help improve their solvency ratio, a key parameter that indicates financial buffer to settle all claims in extreme situations. According to insurance industry experts, the solvency ratio of the three public sector insurers is well below a ratio of 1 while insurance regulator IRDAI mandates that the minimum solvency ratio insurance companies must maintain is 1.5 to lower risks. In terms of solvency margin, the required value is 150%.

Solvency margin is the extra capital companies must hold over and above the claim amounts they are likely to incur. It acts as a financial backup in extreme situations, enabling the company to settle all claims.

Among state-owned insurers, only New India Assurance is in the green. The other three, United India Insurance, National Insurance Company, and Oriental Insurance Company, suffered losses of 6,926 crore in FY22. Even, New India Assurance’s reported a dip in its profits during the September 2022 quarter.

The people cited above said that Budget FY23 did not provide recapitalisation fund for the loss-making general insurance companies. But this will now be provided to ensure improved financial health of insurers in the next fiscal.

If the companies become profitable, the next exercise of listing and privatising at least one of them may begin.

The four public sector firms had appointed EY to suggest restructuring of their operations to bring in profitable growth and employee development through performance and capability management.

Based on initial inputs, a restructuring exercise like closure of offices and redeployment of staff is already being carried out by the insurers.

The government had provided 12,450 crore to these three insurers in FY21 and 5,000 crore in the last month of FY22. No provision for capital has so far been made for FY23.

“No capital provision has been provided for insurers in budget 2022-23. So this money infusion would test their ability to strengthen operations. Also, after this, work on privatising one of the public sector insurers could be started soon,” said the official quoted earlier.

Questions mailed to finance ministry and secretary, department of financial services (DFS), the administrative body in charge of public sector insurers, remained unanswered at press time.

The official said that the government may consider the stock exchange listing of National Insurance and Oriental Insurance after the capital infusion, while United India Insurance may be considered for privatisation. This could change if more capital is provided in FY24, meaning more time required for strengthening the financial health of insurers.

The government had earlier indicated its intent to privatize at least one public sector general insurer. Privatization of insurance companies is easier to process for the government after the General Insurance Business Nationalisation Act was amended by Parliament in 2021 to enable transfer of ownership of companies and privatization. The amendment allows the government to dilute its stake in a general insurance company to below 51%.

Finance minister Nirmala Sitharaman in her Budget 2021 speech had proposed strategic divestment in two public sector banks and one insurance company. But the process is yet to move ahead. In the case of banks, the amendment to the Banking Regulation Act is yet to be passed by Parliament.

This amendment is required before the government can dilute its stake and change management in public sector banks.

United India Insurance is not in best of financial health, having reported losses in the past several quarters. Still, the insurer is considered the best candidate for privatisation as it is thought provide good value to the acquirer, with its nationwide presence and strong market share in various general insurance categories. Moreover, it’s not listed, making the transaction process easier.

The Centre was earlier working on a proposal to merge public sector insurers. Under this, the plan was to merge National Insurance Company, United India Insurance Company and Oriental India Insurance into a single insurance entity, and subsequently list it on exchanges. However, in mid 2020, the government infused 12,450 crore in the three entities looking forward to their profitable growth as single entities.

The general insurance market in the country comprises 27 companies—including the four major PSU entities and 23 private players—plus six 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% compared with the world average of 6.13%. The penetration in the general insurance sector is still less than 1%.

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