The Indian government is moving ahead with a plan to create a mega-insurer with a 35% market share

• As part of the government’s Budget for 2018-19, National Insurance Co, United India Assurance Co, and Oriental India Insurance Co will be merged and partially privatised.
  
• The move is a part of the government’s plan to raise ₹800 billion this fiscal year by selling its holdings in public-sector enterprises.
  
• The combined entity is expected to command nearly 35% of the non-life insurance market in India.

In his Union Budget speech this year, finance minister Arun Jaitley announced that the government was planning to raise ₹800 billion this fiscal year by selling its holdings in public-sector enterprises. A key component of that plan was the merger of the three-state owned general insurers - National Insurance Co, United India Assurance Co, and Oriental India Insurance Co - and the eventual initial public offering (IPO) of the combined entity.

The idea behind the consolidation is to make all three firms stop competing with each other and achieve a certain size and scale by pooling in their collective assets. The combined entity boasts around ₹400 billion in premiums and will become the largest general insurer in India. It is expected to command nearly 35% of the non-life insurance market in India.

That kind of market power is hard to contend with. This kind of size and the logistical advantages that come with it are essential, given that the combined entity will be responsible for operating a number of important government insurance schemes related to agriculture or health coverage. Result? More customers in underinsured areas will be reached.

However, a lot of work needs to be done in the build-up to the merger and IPO. The government commenced preliminary talks on the process late April. It will need to appoint an external agency like a management consultancy to oversee the merger. A blueprint for the integration of all the branch, customer service, IT and HR operations of these insurers needs to be formulated. Staff in overlapping roles will have to be let go, similar products will have to be axed and branches will need to be shut.

But first, an infusion

It recently came to the light that it these insurers will need to improve their solvency margins, or the ability to meet their future debt obligations through a capital infusion. India’s insurance regulator, the Insurance Regulatory and Development Authority of India (IRDAI), recommends an infusion of around ₹100 billion, either by the government or through private investors.

By improving the strength of the balance sheets of these companies, the IPO will become more attractive to future shareholders and fetch a better valuation. However, the government currently has its hands full with the recapitalisation of state-owned banks, so these insurers will have to raise the funds through private means.

What if the investors steer clear of the offering?

If there is a lack of interest in the IPO, then the government will have no choice but to take a stake in the entity through one of its companies. For example, when it partially sold off its stakes in two other insurers -- New India Assurance and General Insurance Corporation of India -- last year, it made the Life Insurance Corporation (LIC) of India, a state-owned life insurer, take a sizeable stake in both to ensure the offering was fully subscribed.

This defeats the purpose of privatisation in the first place. But an IPO is never a guaranteed success, so the government has to have a contingency plan in place. It will likely buy up a portion of the shares on sale through one of it’s large public-sector enterprises if investor demand for this IPO is low.

As of now, the merger is expected to be completed by the end of the current fiscal year on March 31st, 2019.