This article is part of a series on the Indian financial system. As the country grapples with the government's surprise "demonetization" move in 2016, S&P Global Market Intelligence examines various challenges facing the banking and insurance sectors. Click here for a look at government-run banks' outlook.

A bevy of state-owned insurers in India is aiming to follow in ICICI Prudential Life Insurance Co. Ltd.'s footsteps to go public. However, some heavy lifting is needed before that can happen, analysts told S&P Global Market Intelligence.

Four state-owned general insurance companies — New India Assurance Co. Ltd., National Insurance Co. Ltd., Oriental Insurance Co. Ltd. and United India Insurance Co. Ltd. — along with the country's sole state-owned reinsurer, General Insurance Corp. of India, received approval in principle to list their shares publicly in January.

"The additional and regular reporting requirements, once listed, increase the scrutiny of company operations and allow investors to better see whether insurance activities are adding value for shareholders, rather than just writing more premiums," said Philip Jackson, a consulting actuary at Milliman in Mumbai.

New India, the country's biggest nonlife insurer, and GIC Re are likely to make their market debuts in 2017, The Times of India reported.

"The listing of insurance companies is a welcome move," said R. Chandrasekaran, secretary general of India's General Insurance Council in Mumbai. Indian insurers need capital to grow, he said.

However, the other three state-owned general insurers have work to do to attract investors. National Insurance and Oriental Insurance recorded solvency ratios of 126% and 114%, respectively, in the first half of fiscal 2016-2017, lower than the Insurance Regulatory and Development Authority of India's minimum target of 150%, meaning they may have insufficient capital to cover liabilities. United India's solvency ratio stood at 156% in the half year to September 2016.

In addition, United India and Oriental Insurance were told by the government to improve their finances after the two companies suffered net losses in the first half of the current fiscal year, news agency Press Trust of India reported.

"Loss-making insurers can raise money from the market, but they need to have a good story for turnaround," said Sampath Kumar, a senior analyst at Mumbai-based IIFL Institutional Equities. He noted that those insurers may need to change the way they are managed, "perhaps bring in CEOs capable of turning around these companies."

K. Sanath Kumar, chairman and managing director of National Insurance, said the company will proceed with a listing only after it meets all regulatory requirements, including with respect to the solvency ratio, the Financial Express reported.

Meanwhile, National Insurance, Oriental Insurance and United India Insurance may merge to form a stronger entity and gain a better valuation, The Economic Times reported Feb. 23, citing a senior official at the Finance Ministry.

Gross underwritten premiums among India's nonlife insurers grew 28.33% year over year in the first six months of fiscal 2016-2017, despite the sector suffering from lower profit due to underwriting losses and an excessive amount of paid claims, the Press Trust of India reported.

The government's plan to list the five public-sector general insurers "is largely due to corporate governance," IIFL Institutional Equities' Kumar said.

The Indian government has traditionally "focused very little on insurers' financial performance," he said. "Listing would make these insurers accountable to minority shareholders and focus on profitability and efficiency."

In the life insurance space

The September 2016 IPO of ICICI Prudential Life, the second-largest life insurer in India by assets, had generated significant interest as the country's largest offering since 2010. The company, a joint venture between ICICI Bank Ltd. and Prudential Plc, raised 60.57 billion rupees, or 3.4x embedded value.

ICICI Prudential Life's stock was issued at the higher end of its valuation at 334 rupees per share, and was more than 10x oversubscribed. The insurer's stock debuted nearly 11% below the issue price and closed at 362 rupees on Feb. 27.

But the elephant in the room may be LIC, the country's only state-owned life insurer, which holds the lion's share of the market. LIC held market share of 71.7% in terms of new premium income as of the end of 2016, outpacing 23 private sector life insurers in the country.

"A lot of [the new business premiums written by LIC in fiscal 2016] is group premium, but it also wrote more than 50% of the individual new business premium. In comparison, ICICI Prudential Life wrote 9%," Jackson said.

But LIC's huge size and complexity — it was formed in the 1950s after the government nationalized all the private players at the time — is likely to hold it back from pursuing an IPO in the near future. Additionally, the country's insurance regulator has reportedly recently delayed plans to require large insurers to go public.

"[Listing LIC] would be a mammoth and complex task with a lot of political implications, as the company is very large and helps support governmental social security objectives," Jackson added.

As of Feb. 27, US$1 was equivalent to 66.72 Indian rupees.