Merger of the three State-owned general insurance companies into a single entity is likely to rationalise costs and bring about operational efficiency.
Union Finance Minister, Arun Jaitley, on Thursday said that the government will merge the three public sector general insurance companies - National Insurance Company (NIC), United India Assurance and Oriental India Insurance Company into a single entity. This combined entity would be subsequently listed, Jaitley said while presenting the Budget 2018-19 in Parliament.
The profitability of most general insurance companies including the State-owned ones, has been under pressure owing to rising underwriting losses and higher claims. Rationalisation of costs would help bring down combined ratio (a measure of profitability after taking into account the incurred losses and expenses) and improve profitability, said an industry expert.
According to K Sanath Kumar, chairman-cum-managing director, NIC, the merger, if done ‘properly’ could bring about better synergies. “The government made an in-principle announcement regarding the merger today; we will wait for them to give us the clear roadmap. But it (the merger) will drive up the enterprise value of the combined entity,” Kumar told
Currently there are four State-owned general insurance companies (apart from General Insurance Corporation – which is into reinsurance and Agricultural Insurance Company – which is primarily into crop insurance) including New India Assurance, NIC, United India and Oriental India.
Economies of scale
Once the merger takes effect, the combined entity will become bigger than New India Assurance and will have better economies of scale, said Karthik Srinivasan, Group Head – Financial Sector Ratings, ICRA. The merger might also put an end to the rate war and lead to rational pricing of policies. “There is a lot of competition in terms of underwriting and pricing among these four public sector units at present. Once merged, the rate war could go down and might pave way for more rational pricing,” Srinivasan said.