Three State-Run Insurers May Need Rs 10,000 Crore Capital Before Merger

The insurance regulator wants three state-run insurers to infuse Rs 10,000 crore to boost their risk buffers and growth capital before they merge, an official present at a Finance Ministry meeting called to discuss the merger process told BloombergQuint requesting anonymity.

The Insurance Regulatory and Development Authority of India asked the government to either provide the additional funds or allow the insurers to raise tier-II—supplementary—capital from the market, the official said.

Finance Minister Arun Jaitley, in the Budget for 2018-19, had announced that National Insurance Company Ltd., Oriental Insurance Company Ltd. and United India Insurance Ltd. will be merged. The combined entity, which will be largest non-life insurer with nearly a third of the market share, will then be listed.

The regulator wants the three companies to bring their solvency margin—a risk buffer—to the mandatory 1.5 times their liabilities. The three will require at least Rs 1,895 crore, according to BloombergQuint’s calculations based on their disclosure to the regulator.

The solvency margin doesn’t reflect the actual strength of the insurers, according to R Chandrasekaran, secretary general at General Insurance Council. “These companies have large hidden reserves that are not reflected in their books as the solvency margin is estimated conservatively.”

The regulator values assets at their cost of acquisition to calculate the solvency margin of general insurers and doesn’t take into account their market value. “The insurers could utilise these reserves in extreme situations to meet policyholders’ liabilities,” said Chandrasekaran.

AV Girija Kumar, chairman and managing director at Oriental Insurance, agreed. “If the solvency requirements were not in this manner, the three state-run general insurers are well capitalised owing to the large base of assets they hold on their books,” he said.

But solvency margin is just a small part of the capital needed. These companies would also need growth capital as their exposure to government’s crop and health insurance schemes would increase in the future, the official quoted above said. That, going by the estimate, could be around Rs 8,000 crore.

Capital would inevitably be required “as the scale of these government schemes would be massive”, said Kumar.

E-mailed queries to National Insurance and the IRDAI remained unanswered.

The government has held preliminary meetings on the proposed merger, newswire PTI had reported last month citing unnamed people.

The merger process is on track and is expected to be completed by March 31, MN Sarma, chairman and managing director at United India Insurance, told BloombergQuint. He denied any talk of capital infusion requirement from the regulator during the last meeting. “The capital will be required for further expansion, but how that will be funded has not been discussed yet.”