Why allowing general insurers to list is a double-edged sword

Shishir AsthanaMoneycontrolGovernment has approved the market listing of four government-owned general insurance companies and a reinsurer. This move would now enable these companies – New India Assurance, United India Insurance, Oriental Insurance, National Insurance and General Insurance Corporation of India (GIC Re) -- to either issue new shares or sell government’s stake which is currently at 100 percent. As per the listing norm the companies have to bring down government stake to below 75 percent.

Allowing general insurance companies to get listed when none of the private players are listed could raise questions in certain quarters. But before government claims its action as reformist, one needs to point out here that the action was more of a necessity which could not be delayed any further.

Solvency ratio which measures percentage of net assets that an insurance company should have over the net liabilities (includes maturity claims, death claims and expenses) are either near the permissible limit or below it. The permissible limit set by Insurance Regulatory and Development Authority (IRDA) is 150 percent. In other words if a company has a liability of Rs 100 then they should have net assets of Rs 150.

Solvency of most public sector general insurance companies is hovering around the 150 percent mark while in some cases like Oriental Insurance and National Insurance it is below it.

In order to shore up the solvency levels new capital needs to be pumped in. With government barely able to capitalise public sector banks finding funds to invest in general insurance companies would be difficult. The best way, as done by the government, is to get these companies listed and allow them fend for themselves.

Apart from meeting the solvency norms, the general insurance companies need growth capital. Private sector players are well capitalized with solvency ranging from 300 percent to 700 percent.

Public sector players have been losing market share rapidly ever since the private players have entered the market. Government-owned general insurance players account for 48 percent of the nearly Rs 1 lakh crore market (expected market in FY17).

But just getting listed is not the end of journey, in fact it is the start of a new one. Public sector players have survived under the protection of government, where little information were shared with the public. But having listed would make them more transparent and investors would expect them to be more forthcoming. In order to meet investors regularly, these companies will have to lift their governance and communication levels. Their performance will be benchmarked against other players in the industry and the companies will have to perform better to avoid embarrassing queries.

Having said that, government cannot wash away its hands just because the companies are getting listed. General insurance companies, like public sector banks, are taking risks which private players are not willing to take. Take the case of crop insurance. Government only subsidises a part of the premium but the entire risk of a crop failure is on the insurance companies.

Alice C Vaidyan, Chairman and Managing Director of GIC Re, in an interview with Moneycontrol said that growth in premium collection in this year was largely on account of crop insurance which was re-launched last year. With only 20 percent of farmers covered till date and the government targeting all farmers to be covered over the next two year, this segment can contribute to the growth as well as risk of the insurers.

Also, government needs to work equally professionally as their private sector promoters. Oriental Insurance has been operating without a CMD (it has an officiating CMD) for some time now. After being listed, government will not have the benefit of being lethargic.

On the whole allowing government-owned general insurance companies to get listed is a step in the right direction; the move is a double-edged sword for the insurance companies as being listed will give them multiple opportunities to raise funds but at the same time the onus will be on them to perform to attract capital.