Every year, right before the Budget, state-owned insurers line up requests for capital infusion with the government. With insurance being a capital-intensive sector, the requirements of the companies is atleast Rs 2,000-3,000 crore on an average.
Due to its sheer size, the Life Insurance Corporation (LIC) does not have such capital infusion requirements. However, its cousins in the public sector general insurance space aren’t so lucky.
The insurance industry is in its teens after the privatisation process. With 24 life insurers and 33 general insurers and a domestic reinsurer, the industry provides ample choice for the customers. However, the rise in new types of product offerings and newer risks has led to a steep rise in claims ratios.
For instance, the claims ratios have risen to 130 percent in motor third-party insurance. This means that for every Rs 100 collected as premium, Rs 130 is paid out as claims. This means that insurers are required to set aside additional capital to pay claims.
In the midst of a capital crunch, the government is looking to create a monolith structure for the public sector unit (PSU) general insurance space. While initial work has begun on the proposal, sources told Moneycontrol that the vision is to have one large PSU general insurer that is highly solvent and is able to handle large risks.
The four state-owned general insurers, New India Assurance, United India Insurance, National Insurance and Oriental Insurance were formed after amalgamation of 50 plus companies in 1972.
Later, in February 2018, former finance minister Arun Jaitley in his Budget speech announced the merger of United India, National Insurance and Oriental Insurance.
The idea was that the merged entity with a value of Rs 1 lakh crore would subsequently be listed on the stock exchanges. This process has been delayed with a drop in the solvency or minimum capital that is set at 150 percent of 1.5 times assets versus the liability.
In between the delays and review of the merger timeline, the idea of a monolith state-owned general insurer has been proposed. While one may argue against all PSU insurers being merged, the fact is that several of these entities have faced capital constraints.
Rather than having mid-size to large PSU insurers with constant thirst for capital due to rising claims and losses, it would be more viable to have one strong state-owned general insurer like LIC.
Consolidation is inevitable and it is imperative that the monolith insurer idea be operationalised sooner. For policyholders as well, having one public-sector insurer with a strong balance sheet and clear product strategy would be beneficial.
Twenty years after privatisation of insurance, LIC has remained on top with respect to premium collection, policies sold and is still the market leader. Lessons from how LIC has benefited from being a large insurer and institutional investor can be taken as cue to initialise this exercise in the PSU non-life sector as well.