Budget 2020: PSU insurers’ recapitalisation may be inadequate; delay merger, IPO

The Rs 6,950 crore recapitalisation of three state-owned general insurers National Insurance, Oriental Insurance and United Insurance may be inadequate for the companies. While the insurers sought Rs 12,000 crore for maintaining the solvency or minimum capital, lower-than-required funds would lead to the delay of the proposed merger of the companies.

The budget documents showed that the provision was for the higher requirement for maintaining the requisite minimum solvency ratio by each of the three public sector general insurance companies.

The revised estimate of 2019-20 made a provision of Rs 2.500 crore which had been hiked to Rs 6,950 crore.

Solvency levels of the three PSU insurers have been dwindling. At the end of Q2FY20, United India solvency stood at 105 percent, Oriental Insurance's solvency stood at 156 percent as of Q1Fy20. Among these, National Insurance solvency dropped from 104 percent at the end of FY19 to 95 percent as of Q1FY20.

A level of 150 percent is stipulated as the minimum solvency or capital requirement by the Insurance Regulatory and Development Authority of India IRDAI). This roughly means that the assets must be 1.5 times the liability.

The finance ministry said that a partial budgetary support had been made in revised estimate through first batch of supplementary demands for Grants and provision for further capital infusion is included. The provision is met from the National Investment Fund.

The merger process

The PSU insurers' merger has been a pet project of the BJP government. It was announced by former finance minister Arun Jaitley in his February 2018 Budget speech. The idea was that the merged entity would subsequently be listed on the stock exchanges.

The idea to merge the three insurers was to create a stronger and larger insurance company that was sustainable in the long run. The other two state-owned entities, New India Assurance and General Insurance Corporation of India, are listed on the exchanges.

EY was appointed as the consultant for the process in December 2018. The initial estimates suggest this will be the largest non-life insurance company in India valued at about Rs 1.5 lakh crore.

On one hand, while there has been a delay in the merger process, there are also human resource concerns. The insurers’ unions have also expressed concerns about the merger of the entities, saying this would lead to retrenchment of staff at the mid and junior levels.

Considering these challenges, sources said that the actual merger will only be initiated in FY21. The listing could either be end of March 2021 or the first quarter of FY22.

This has been cited as the pre-condition before the proposed merger process begins. With inadequate funds in the recapitalisation process, the merger could be delayed by another two to three quarters.