Economy
Struggling PSU insurers may get a helping hand from the finance minister
Summary
- A fund infusion to the tune of about ₹4000 crore- ₹5000 crore in three financially weaker public sector insurance companies—National Insurance, Oriental Insurance and United India Insurance—could be made after assessing the funding requirements of these public sector general insurance companies
New Delhi: The Centre plans to strengthenweak public sector general insurers with capital support to help them meet regulatory requirements, ahead of a potential public listing and privatization. An announcement in this respect is likely in next week's Union budget or in the latter part of the current fiscal year, two people aware of the matter said.
The finance minister may allocate ₹4,000-5,000 crore for three public sector insurance companies, one of the two people cited above said, requesting anonymity. "The budget could also provide only a token capital for insurance companies, with more funds released after completing further assessments for fresh requirements," the person said.
In the interim budget for FY25 presented in February, the Centre had considered providing capital support to general insurers; however, the decision was postponed as the Centre wanted to first study their financial health in the June quarter, the second person mentioned above said.
Improving finances
The capital infusion will help improve the financial health of three firms—National Insurance Co. Ltd, Oriental Insurance Co. Ltd and United India Insurance Co. —as well as their solvency ratio, a measure of the financial buffer to settle all claims in extreme situations.
C.R. Vijayan, former secretary general, General Insurance Council said: “There is marked improvement in performance of the three weaker public sector general insurance companies since the last capital support was extended by the government in FY22. These companies have also completed implementation of recommendations given by EY to restructure their operations. Additional capital infusion at this juncture would help the insurers to further strengthen their financials and reach closer to Irdai-mandated solvency ratio of 1.5 (times)".
The solvency ratio of all three public sector insurers is well below 1, lower than 1.5 times mandated by the insurance regulator to lower risks.
In terms of solvency margin, the required value is 150%. Solvency margin is the extra capital general insurance companies must hold over and above the claim amount they are likely to incur.It is a financial backup in extreme situations, enabling an insurer to settle all claims.
Report card
Among state-owned insurers, only New India Assurance is in a financially strong position. Its solvency ratio in FY24 was a healthy 1.81, as it remained the leader in India's general insurance industry. The company's profit after tax rose 7% to ₹1,129 crore in FY24.
The other three public sector general insurers fared worse.
National Insurance Co. reported a net profit of ₹31 crore in the March quarter, but an FY24 loss of ₹187 crore.The company had reported ₹3865.40 crore loss in FY23. Its solvency ratio at the end of FY24 stood at -0.45.
Oriental Insurance Co's net profit stood at ₹19 crore for FY24, up from a whopping loss of ₹4,968 crore in FY23.Its solvency ratio stood at -1.06 at the end of FY24.
United India Insurance Co. reported a loss of ₹804 crore in FY24, down from ₹2,829 crore losses in FY23.The company's solvency ratio stood at -0.59 in FY24.
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The four public sector firms had earlier appointed EY to suggest ways to restructure their operations for profitable growth and employee development through performance and capability management.
While the FY24 annual budget and the interim budget for FY25 did not provide recapitalization funds for the loss-making general insurers, the Centre is considering it this time to ensure the improved financial health of insurers in the next fiscal, the person cited above said.
"If the companies turn profitable during FY25, the course of action could be listing and privatizing at least one of these general insurance companies, which could happen next fiscal," the person added.
Interestingly, the government had provided ₹12,450 crore to the three loss-making insurers in FY21 and ₹5,000 crore in FY22, but there were no provisions in FY23 and FY24.
Queries emailed to a finance ministry spokesperson and the Department of Financial Services (DFS) secretary remained unanswered.
Public listing
Among the four general insurers, the government may consider a public listing of National Insurance and Oriental Insurance after the capital infusion, while United India Insurance could be a candidate for privatization, the second person mentioned above said.
In her budget speech in 2021, finance minister Nirmala Sitharaman proposed strategic divestment in two public sector banks and one insurance company.However, the process has not made progress.
CareEdge Ratings estimates that the Indian non-life insurance market will grow at about 13-15% in the medium term.
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"The overall business growth would be supported by macroeconomic factors, a favourable regulatory environment, and the Bima Trinity. Further, a focus on containing overall expenses and strengthening distribution networks (is also anticipated) to contribute to the sector's growth," the ratings company said in a May report on the non-life insurance sector.
"Additionally, reports of composite licenses and M&A could alter sectoral dynamics. The overall outlook for the non-life insurance sector remains stable in the medium term. However, intensified competition and an uncertain international geopolitical environment could potentially affect economic growth and subsequently impact the non-life insurance sector," it added.
