Budget 2018: Increased medical insurance coverage is likely to provide more business opportunities. However, given the precarious profitability of the earlier schemes, the pricing of the scheme would remain a key monitorable. The merger of the three general insurance companies is expected to be a positive given the benefits from greater economies of scale and reduction in unhealthy competition. It would also benefit private sector insurers. A merger prior to listing would also result in better valuation of the entity. The merger of the three state-run insurers would lead to the creation of a mammoth organisation and would be a key part of the government’s divestment target of Rs 80,000 crore for fiscal year 2018-19.
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The proposal is part of the government’s divestment drive and follows the listing of two other public sector insurers: New India Assurance (NIA) and General Insurance Corporation (GIC). The government had offloaded 11.65% stake in NIA and 12.5% in GIC for Rs 7,653 crore and Rs 9,704 crore, respectively. While the shares of NIA are trading 16.5% below its offer price on BSE, GIC is trading 17.4% below its offer price. The profitability of most general insurance companies including state-owned ones, has been under pressure owing to rising underwriting losses and higher claims.
The rationalisation of costs would help bring down the combined ratio (a measure of profitability after taking into account the incurred losses and expenses) and improve profitability.
Impact: PositiveJ
