A merger and subsequent listing of three struggling state-owned Indian insurers could reduce "unhealthy competition" in a crowded market and help the trio become more efficient, according to industry sources.
Indian Finance Minister Arun Jaitley said Feb. 1 in a speech outlining the country's 2018-2019 budget that National Insurance Co. Ltd., Oriental Insurance Co. Ltd. and United India Insurance Co. Ltd. would be merged and subsequently listed, as part of a broader plan to float state-owned companies to increase accountability and unlock their "true value." The government in November 2017 listed the country's largest general insurer, New India Assurance Co. Ltd., and although it has traded below its listing price, sources say it has taken steps in the right direction.
It is also in better shape than the to-be-merged trio: New India had a solvency ratio of 224% at Sept. 30, 2017, compared to 162% for National Insurance, 152% for Oriental Insurance and 108% for United India Insurance. The regulatory minimum is 150%.
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New India's underwriting performance is also better, although still loss-making — it recorded a first-half combined ratio of 111.76%, compared to 119.95%, 121.62% and 121.31% for National, Oriental and United. The combined ratio reflects claims and costs as a share of premiums; a figure over 100% implies an underwriting loss.
The three companies to be merged have suffered in part because of their inefficiency and because they are in constant competition with each other, said Rahul Agarwal, founder and CEO of Ideal Insurance Brokers Pvt. Ltd.
"Currently there is a lot of unhealthy competition among these three, which will stop post their merger," he said, describing competition in the market more broadly as "absolutely rampant."
"New India Assurance has become more rational after the IPO," he added, but "National Insurance and Oriental Insurance are more irrational in quoting for bad risks."
Anand Bhavnani, a research analyst at portfolio management and investment advisory company Sameeksha Capital, echoed that view, saying, "Given that the three [state-owned] general insurance companies were massively losing money in underwriting policies, [the] merger will stop the deleterious competition among them."
Among 32 players in India's nonlife insurance segment, the four public-sector insurers together held a market share of 45% in terms of gross direct premium underwritten as of December 2017, according to statistics from the Insurance Regulatory and Development Authority of India. That dominance means the public-sector insurers set the tone for the rest of the market.
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They "set the market prices and then everybody has to compete," said Kapil Mehta, founder and CEO at SecureNow Insurance Broker Pvt. Ltd. "I often see large group health insurances picked up at prices below historical claims. This means that a loss is guaranteed."
He added, however, that he feels that the merger is not a great idea because "underwriting and fiscal discipline are not uniformly good and there are several patchy areas" in the three companies.
He also noted that despite the improvement in New India's underwriting discipline and profitability, its shares have traded below their offer price since listing.
"This is what drives lower market values because the market would prefer profits in the core underwriting business," Mehta said.
Yet Bhavnani and Mehta also suggested that if the merger succeeding in reducing competition, the broader insurance sector would benefit as well.
"If [they] were to charge the correctly priced premium for insurances, then everybody would benefit," Mehta said. Increasing premiums per policy could lift overall premium growth in what remains an underpenetrated market, he added.
As the world's seventh-biggest economy in 2016, India's insurance penetration, or premiums as a percentage of GDP, was only 0.77% in the nonlife segment, ranking 76th globally, meaning that the country has significant growth potential, according to global reinsurer Swiss Re's latest sigma report on industry trends.


