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Even as the government introduces laws to allow the privatisation of state-owned general insurance companies, the rationalisation plan is moving forward.

In order to cut costs and improve profitability, public sector non-life insurance companies have initiated a restructuring process that involves decreasing their branch network. National Insurance, Oriental Insurance, and United India, three weak PSU insurers, are aiming for a 25% office rationalisation through mergers and closures, reported The Times of India.

Even as the government introduces laws to allow the privatisation of state-owned general insurance companies, the rationalisation plan is moving forward. On August 18, the General Insurance Business (Nationalisation) Act — or GIBN Act — was amended. The amendment provides that the provisions of this Act will cease to apply in respect of any designated insurer on and after the date on which the central government ceases to control that insurer after the start of the GIBN Act.

Branch Reduction

Following the announcement in the Budget that one PSU non-life insurer would be sold, the finance minister stated that employee interests would be preserved and that privatisation would not result in the sale of the company. The non-life companies’ officers’ association has petitioned the government, requesting that the three non-life companies be merged rather than sold to strengthen them. Some senior PSU officials believe that merging with New India Assurance is the only viable option because solo companies may not be appealing to investors.

“It makes sense to combine and rationalise the three weak PSUs – National, Oriental, and United India. If the merged entity decides to go public, it should do so when the merger process is completed and the merged entity is stable and profitable,” The Times of India quoted sector regulator Irdai’s former member KK Srinivasan as saying. He went on to say that the government should not be in a rush to sell off its stakes in New India Assurance and GIC Re.

How they fare

According to its public filings, National Insurance made a loss of Rs 2,751 crore in FY21. In comparison to statutory 1.5, the company’s solvency margin ratio to required solvency margin had dropped to 0.12. Oriental Insurance has a solvency ratio of 0.92 and a deficit of Rs 1,498 crore. United India reported a Rs 300 crore deficit and a 0.7 solvency ratio.

The three PSU insurers now have more than 5,200 offices, down from 6,001 in March 2021. A merger of the three PSUs, according to the officers’ association, would cease unhealthy competition and bring in economies of scale. “We could achieve the goal of economies of scale by following a process of proper merger and consolidation of existing offices, with the ensuing operational offices having a substantially larger average size than the comparable current office,” the National Confederation of General Insurance Officers Association had said in their representation to Niti Aayog in July.