The government may infuse fresh capital into its loss-making general insurers in the next financial year to strengthen their operations and help them meet regulatory requirements, two people aware of the plans said.
The Union budget may allocate additional capital for these insurers after reassessing their quarterly parameters in the nine-month period ending December 2024, the people said on the condition of anonymity.
At three of the weak state-owned general insurers, solvency ratio – a key requirement for insurers to continue servicing their customers – is expected to turn positive after the capital infusion. Solvency ratios at National Insurance, United Insurance and Oriental Insurance stood at -0.45, -0.59 and -1.06 at the end of FY24, against the minimum required 1.5.
Though the quantum of capital support will be worked out early next year, it may be ₹4,000-5,000 crore and would be contingent upon companies showing signs of consistent improvement in financial parameters and growth, the first of the two persons quoted earlier said.
Low solvency ratios
“Solvency ratios of the three public insurers — United India Insurance Co., National Insurance Co. and Oriental Insurance Co. — is still low. The government has sought exemption from the Insurance Regulatory and Development Authority of India for all three entities from meeting regulator-mandated solvency margins. We will assess the performance of all three entities afresh, and if we find marked improvement in their performance, capital infusion may be done to strengthen them further,” the second person added.
“The further strengthening of operations of the three entities may be a precursor to planned listing and privatization of one or all the companies,” the person added.
Queries sent to finance ministry and secretary, department of financial services (DFS), the administrative body in charge of public sector insurers, remained unanswered at press time.
In terms of solvency margin, the required value for insurers is 150%. Solvency margin is the extra capital companies must hold over and above the claim amounts they are likely to incur. It acts as a financial backup in extreme situations, enabling the company to settle all claims.
Though National Insurance and United Insurance have reported profits in a few quarters in FY24, the profits have been minuscule and fleeting, keeping solvency margins well below requirements. Moreover, the companies were back in red in FY25, and continue to give weak performance even in FY25.
Only one profitable
Among state-owned insurers, only New India Assurance is profitable. The only listed PSU general insurer reported a net profit of ₹1,129 crore in FY24. Its solvency ratio also remained healthy at 1.81 and the company continues to be the market leader in the Indian general insurance industry.
“This proposed capital infusion measure will be welcome for the financial sector in general and the public sector general insurance companies in particular because the insurance market – both life and general – is here to stay and grow sharply in line with the general trend globally and the steady growth of the Indian economy. But it has to be made unequivocally clear to these companies that this is a one-off measure and they cannot expect a bailout every time they fail to balance their books because of the cost to the public exchequer, multiple priorities, including financial inclusion of the government and the compelling need to adhere to the fiscal deficit glide-path,” Manoranjan Sharma, chief economist at Infomerics Ratings and former chief economist at Canara Bank said.
The government had provided ₹12,450 crore to these three insurers in FY21 and ₹5,000 crore in the last month of FY22. Another dose of capital in FY26 is considered timely, since these companies have started showing signs recovery.
“Accordingly, these capital-starved companies will need to focus on a slew of broad-spectrum measures, including organizational restructuring, product rationalization, cost rationalization and digitalisation. This is a difficult but doable work and requires, inter alia, signing of a memorandum of understanding (MoU) between the government and these companies, mutually agreed performance indicators and close and careful monitoring of these indicators all along the line for a discernible and sustained improvement in profits and profitability,” he added.
Conditional infusion
The first person quoted above said capital infusion insurers would be conditional upon companies restructuring their operations. Earlier, the companies were advised to move out from loss-making fire and motor insurance.
“To strengthen loss-making public sector insurers, the government can provide immediate capital infusion linked to operational reforms and cost optimization. Strategic disinvestment or privatization could bring in expertise, and to quite an extent, higher orientation towards financial well-being and growth without offloading the social responsibility they have been shouldering. This will eventually reduce fiscal burden,” said Rajeev Saxena, partner at S.N. Dhawan & Co Llp, a chartered accountancy firm.
The four public sector firms had earlier also appointed EY to suggest restructuring of their operations and bring in profitable growth and employee development through performance and capability management. Based on initial inputs, they have closed some offices and redeployed staff.
Merger the alternative
An alternative to capital infusion could be to merge these three companies with the profitable New India Assurance, said Venkatesh Raman Prasad, partner, JSA Advocates & Solicitors. “However, merger of a profitable listed entity with three unlisted loss-making entities may have its own set of complexities and challenges. The government may consider listing of these entities which may help them in gaining access to private capital while reducing dependence on government capital,” Prasad added.
India’s general insurance market comprises 27 companies, including the four major PSU entities mentioned above, 23 private players and six stand-alone health insurers.
According to reports from insurance companies and the India Brand Equity Fund (IBEF), the insurance density in India (ratio of premium to total population) is $73, compared with the global average of $650.
Insurance penetration in India is at 3.69% compared with the world average of 6.13%. Penetration in the general insurance sector is below 1%. Insurance penetration is the percentage of total insurance premiums collected in a country compared to its GDP, and is used to assess the development of a country’s insurance sector.
Visit: Valley Vision News
