The government is planning to expedite the merger of three public sector general insurance companies – National Insurance Company, Oriental Insurance Company and United India Insurance Company. Though former Finance Minister Arun Jaitley had announced their merger in his Budget speech 2018-19, there was hardly any momentum in its implementation. However, sources in the Finance Ministry have indicated that the government is now serious about the merger of three companies.
“Earlier, the department of disinvestment had its own ideas as to how this merger of three companies has to happen to maximise the valuation potential. After examining everything over time, we have decided to go ahead with the merger plan that was announced in Budget 2018-19,” sources said.
Meanwhile, Budget 2019-20 – announced by incumbent Finance Minister Nirmala Sitharaman – has proposed the enabling provision for the merger of non-life insurance companies by seeking to amend the General Insurance Business Nationalisation Act. The Finance Bill proposes to replace the section that says “there will be four companies” with “there will up to four companies”.
This means there could be three companies or two companies or just one entity in the government sector. The three companies had appointed EY as a consultant for the merger. With continuity in the elected government ensured, action on the merger of the three public sector undertaking (PSU) general insurance companies is bound to gather momentum now.
“Merger of three weak companies may not immediately create one strong company. But it will surely eliminate suicidal business competition among the three,” said KK Srinivasan, former member, Insurance Regulatory and Development Authority of India.
After the 2018-19 Budget speech, “there was little concrete action on the merger. The intervening period of uncertainty, coupled with delays in appointment of CMDs of two out of the three companies, appear to have adversely affected the performance of the three. Any further delay will not augur well for the health of these companies,” he added.
The three companies have different technology and IT platforms. Platform migration and integration will be an immediate challenge. Apart from the technological issues, there will also be formidable HR issues given the proliferation of trade unions in the three PSU insurance companies. “Here the role played by the chairman of SBI in the smooth merger of its associate banks with it, perhaps will serve an example worth learning from,” Srinivasan said.
Though the proposed merger of three PSU general insurers to create the largest general insurance company in the country, the plan is likely to make redundant 10,000-15,000 excess staff and result in savings of over Rs 3,000 crore annually, insurance officials said. While these insurers each have around 800-900 branches and around 15,000 employees and Rs 30,000 crore of assets, it is not clear what they will do with the excess staff.
Officials said cut-throat competition among state-run general insurers will come to an end after the merger, and cost of operations will come down. As of now, all three firms put together have 90 regional offices, which will now come down to 30 post merger. The three companies, among themselves, have some 1,200 divisional offices (DOs) with each DO costing around Rs 5 crore annually.
“If the number of DOs is rationalised and some shifted to unrepresented areas and the total number reduced to around 600, the savings in cost is around Rs 3,000 crore annually. The huge savings in cost alone will turn the entity into a profitable one, provided the business momentum is maintained,” said an official.
“More than physical merger, emotional integration of the companies is important to achieve the desired results,’’ said the CMD of a public sector insurance company, who wished for anonymity. The four PSU general companies were created in the 1970s to provide a modicum of competition in the government monopoly environment.
With liberalisation and opening up of the market to private players, unhealthy competition among the four companies has resulted in them rapidly going down in terms of profitability and solvency. It is worth noting that unlike unions in other public sector companies, all major unions in the public sector general insurance companies have demanded merger of state-owned general insurers. The government is unlikely to face any opposition from the unions for merger.