Mumbai: Policyholders may be allowed an exit option in case of mergers and acquisitions (M&A) involving insurers, a committee appointed by the industry regulator to draft rules for such deals has recommended, said two people familiar with the development.
The move assumes significance as prospects for consolidation have risen, with at least three firms knocking on the doors of the Insurance Regulatory and Development Authority (Irda) with M&A proposals.
Existing M&A norms for insurers need to be altered to protect the interests of policyholders, according to the committee’s report, which is likely to be unveiled by June, said one of the people cited above. Both spoke on condition of anonymity.
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The six-member panel was appointed by Irda last month to suggest comprehensive guidelines for M&As in the insurance industry.
Although the Companies Act covers the basic norms governing such deals, mergers of insurance companies bring an added dimension since they affect millions of policyholders.
The insurance industry has been transformed after being opened to private companies in 1999-2000. With new firms coming in and the market freed up, there is no uniformity in pricing even among policies with similar terms. With pricing even more diverse in non-life insurance, the merger of companies offering products in this segment could give rise to greater complications for policyholders.
Mint had reported on 29 March that Reliance Capital Ltd-owned non-life insurance subsidiary Reliance General Insurance Co. Ltd may merge with RSA Insurance Group Plc (formerly known as Royal Sun Alliance), as the latter is likely to exit its joint venture with Chennai-based partner Sundaram Finance Group in Royal Sundaram Alliance Insurance Co. Ltd. In 2006, Reliance Life Insurance Co. Ltd had acquired AMP Sanmar Life Insurance Co. Ltd.
“When two entities merge, policyholders may not be comfortable with the changed terms and conditions the merged entity may offer,” said the first person cited above. “So, the committee is proposing to allow policyholders to continue with the original terms and conditions. If they are not comfortable with the change of ownership or any other terms offered by the merged entity, they should be allowed an option to exit.”
The move is in line with similar provisions laid down by capital markets regulator Securities and Exchange Board of India in the case of M&As among asset management companies.
M&As involving insurers are presently governed jointly by the provisions of the Companies Act, 1956, and the Insurance Act, 1938, which according to many industry experts are outdated.
Irda currently does not have the power to frame regulations for M&As. The Insurance Act Amendment Bill, which is pending in Parliament, if approved, will confer such powers to the regulator.
There haven’t been many M&As in the insurance industry in the past six decades. The provisions of the Companies Act are inclined more towards protecting the interest of investors, shareholders and creditors, and not policyholders. “The policyholder base has grown manifold since the formation of LIC (Life Insurance Corp. of India) and the entry of private players in 2000,” said the second person cited above. “The existing laws would have worked fine with a small customer base, but as the base increases it is critical to protect policyholders’ interest when two companies merge.”
There are at present 23 insurers each in the life and non-life space in India. The total assets of life insurers are estimated at more than Rs10 trillion, with LIC being the largest.
Another key recommendation seeks to ensure that the acquirer has enough assets and re-insurance to adequately cover the potential liabilities of the target company towards its policyholders for at least 10 years.
The new guidelines are likely to specify minimum net worth requirements to cover such liabilities, and if they do not, the regulator may prescribe a time frame to comply with the same.
Existing laws do not recognize the interests of policyholders as being different from that of investors or creditors of the company. Factors such as customer profile, pricing of policies and mortality rates need to be examined for this purpose, according to the first person quoted above.
The committee will also recommend guidelines so that unfair competition or monopoly is not created in the industry due to an M&A. “When two companies merge or an acquisition takes place, the combined entity may get the single largest monopoly, which may stifle competition and affect the pricing of products adversely,” said the second person quoted above. “A recommendation will examine this issue.”
The committee will also draft the rules and provisions governing mergers following moratorium orders by Irda, in line with that of the Reserve Bank of India.
A moratorium is an order staying the start or continuance of all actions and proceedings against a company that may be considered to be ailing. A regulator can direct a company under moratorium to be acquired or to merge its businesses with a stronger firm.
The Irda committee will explore the conditions that might necessitate regulatory action against certain companies under this condition.
The committee will also recommend rules for appointing an official liquidator in certain special situations arising out of mergers. In such cases, the liquidator is required to realize the assets and dispose of the company’s liabilities.
The licensing system of insurers, which at present follows a three-stage process, is also likely to be relaxed, according to another recommendation of the committee.
“At present, the board is involved in all the three stages of the registration process, which is cumbersome and time consuming,” said the second person cited above. “The recommendation is to make this a two-stage process and reduce the involvement of the board or shareholders of the company that seeks a licence from Irda.”