State-owned general insurance companies have played a vital role in India. The insurance business was nationalised through the General Insurance Business (Nationalisation) Act (GIBNA) 1972. All the erstwhile 107 insurers were merged and grouped into four companies – Oriental Insurance Company Limited (OICL), the United India Insurance Company Limited (UIICL), New India Assurance Limited (NIAL), and the National Insurance Company Limited (NICL). The General Insurance Corporation (GIC) of India was incorporated as a private limited company in 1972.
The government transferred all the shares it held of the general insurance companies to the GIC. Therefore, all four insurance companies had become subsidiaries of the GIC. However, with the GIBN Amendment Act, 2000, the ownership of four subsidiaries along with the GIC was again vested with the government.
The general insurance companies are serving people across the country. They have a branch network of over 5,750 offices. While their 50% branches are located in tier 2, 3, and 4 cities and towns, the private insurance companies have less than 7% branches in smaller cities. However, in the recent past, the financial performances of Oriental Insurance Company Limited (OICL), the United India Insurance Company Limited (UIICL), and the National Insurance Company Limited (NICL) have not been satisfactory. They have started incurring losses.
The OICL pegged a loss of Rs 1,525 crore and the financial results of UIICL, and NICL for FY21 is not available on the company’s website. But the combined loss of these two companies is expected to be approximately Rs 5,000 crore. According to the Economic Times, the NICL incurred a loss of Rs 4,627 crore in FY21 against Rs 4,108 crore in FY20. The UIICL’s financial performance is also not good. Nevertheless, the financial performance of the company improved in the last fiscal. Its net loss decreased to Rs 1,485 crore in FY20 from the net loss of Rs1,878 crore in FY19.
Maintaining the solvency ratio is also a big challenge for these companies. The solvency ratio is the excess of the value of assets over the insurance liabilities. As per IRDA, all insurance companies need to maintain a surplus of 1.5 times their liabilities at all times. However, state-owned general insurance companies are enjoying special dispensation for solvency requirements. The solvency ratio of UIICL was 0.30 in 2020 as against 1.52 in 2019. The required solvency margin was Rs 4,583 crore for FY20, but the company had an available solvency margin of only 1,364 crore. The OICL’s solvency ratio stands at 1.52 in FY21. In FY21, NICL’s solvency ratio stood at 1.21 against 0.02 in 2020.
Against this backdrop, the government is infusing capital into these three loss-making general insurance companies to meet regulatory requirements. The government infused Rs 12,450 crore in these three companies last year. As per initial estimates, OICL, UIICL, and NICL together need about Rs 5,000 crore in the current fiscal to maintain the solvency ratio as per the criteria of IRDA.
To improve the performance, the government tried to consolidate three loss-making companies into one company. In the budget for FY2018-19, the-then finance minister Arun Jaitley had proposed merging the Oriental Insurance Company Limited (OICL), the United India Insurance Company Limited (UIICL), and the National Insurance Company Limited (NICL). He also proposed to list it on stock exchanges. But the process of merger got delayed and could not be executed.
In 2020, the union cabinet headed by Prime Minister Shri Narendra Modi, for capital support to these insurance companies, junked the budget proposal of merging NICL, OICL, and UIICL. In the meeting, the cabinet committee had also decided to increase authorised share capital of these three insurance companies to Rs 7,500 crore of NICL and Rs 5,000 crore each to OICL and UIICL to give effect to the capital infusion decision.
In the next step, the government decided to privatise general insurance companies under the new strategic disinvestment policy for Atmanirbhar Bharat. Finance minister Nirmala Sitharaman had proposed to privatise one of the state-owned general insurance companies in her budget speech for FY22. The NITI Aayog was tasked to recommend a suitable candidate for privatisation of a general insurance company. The NITI Aayog has recommended the privatisation of the United India Insurance Company Limited (UIICL) to the core group of secretaries on disinvestment chaired by the cabinet secretary.
The privatisation process of PSUs requires the approval of Parliament. As the insurance business of India was nationalised in 1972, so the government via an executive order cannot override parliamentary legislation. The apex court of the country has already ruled, in the case of two oil PSUs – HPCL and BPCL – that the government could not go ahead with the disinvestment of PSUs without getting approval from Parliament.
Therefore, the government, after approval of the cabinet, introduced the General Insurance Business (Nationalisation) Amendment Bill, 2021 in the Lok Sabha on July 30, 2021, to amend the General Insurance Business (Nationalisation) Act, 1972, and to provide for greater private sector participation in state-owned insurance companies. The bill was also passed by the upper house on August 11 amid uproar by opposition parties. The opposition parties wanted the bill to be sent to a select committee. It is expected that insurance companies will be privatised before state-owned banks.
The amendment will remove the clause for the Centre to hold at least 51% shares in general insurance companies at any given time. Now, it will be able to attract private investment. It is expected that the public-private participation will help get more resources and that would be helpful in improving the health of insurance companies. The government has fixed the target of disinvestment at Rs 1.75 lakh crore for the current fiscal. Hopefully, the privatisation of one general insurance company along with other PSUs will help to achieve the government’s ambitious target.
Vinay K Srivastava teaches at I.T.S Ghaziabad. His Twitter handle is @meetdrvinay. The views expressed in this article are those of the author and do not represent the stand of this publication.
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