Budget 2019: Not just public-sector banks (PSBs), the upcoming Budget will likely allocate a capital of Rs 4,000 crore for infusion into three state-run general insurance firms —National Insurance Company, Oriental Insurance Company and United India Insurance Company — that the government has proposed to merge. The infusion is aimed at shoring up the solvency of these insurers, two of which (barring Oriental Insurance) are struggling to maintain the solvency ratio requirement of 1.5.
The department of financial services (DFS) had submitted this proposal earlier but the interim Budget had not made any provision for it. “This is likely to be taken up in the upcoming Budget. Before any merger, the capital adequacy of these companies have to be propped up,” said a source. Finance minister Nirmala Sitharaman will present the Budget for 2019-20 on July 5.
An increase in underwriting losses and higher claims have eroded the profitability of many general insurance companies, including the state-run ones, in recent years, causing their solvency ratio to slip. To help PSBs meet regulatory requirement and grow out of the bad loan mess, the government has been infusing capital into them in recent years. Last fiscal, it infused Rs 1.06 lakh crore into PSBs, on top of Rs 88,139 crore in FY18. Since FY15, the government had infused a total of Rs 2.51 lakh crore into state-run banks.
According to initial estimates, the larger entity formed by the merger of the three insurers will be the largest non-life insurance company in India, with a value of Rs 1.2-1.5 lakh crore. While Oriental Insurance’s solvency ratio stood at 1.66 as of March 2018, United India had a solvency margin of 1.54 and National Insurance’s was 1.55. Analysts say without infusion to shore up capital base, any merger exercise will be unwise.
The process of the merger – announced in the Budget for 2018-19 – had started last fiscal, with the shortlisting of management consultancy firm EY to advise on the proposed move. However, the merger has been delayed beyond the budgeted target of 2018-19, as various issues – ranging from the rationalisation of branches and workforce to integration of software — are in the process of being sorted out. The government intends to list the broader entity after the merger.
The three insurance companies together accounted for 200 insurance products and a market share of around 35% as of March 2017. Their combined net worth was to the tune of Rs 9,243 crore and employee strength of around 44,000 across 6,000 offices. The government had, in 2017, raised more than Rs 17,500 crore by listing state-run New India Assurance Company and General Insurance Corporation of India.