Bangalore: The government is expected to take up the insurance amendment Bill seeking to increase the capitalisation of the public sector insurers. Amendments to the General Insurance Business (Nationalisation) Act (GIBNA) of 1972 have remained in cold storage since 2004, as long as the Left parties were part of the ruling coalition. With the exit of the Left parties from the ruling coalition, highly placed sources said, the passage for making amendments to the Act was now clear.
The proposal was to insert an enabling provision in GIBNA that would allow PSU insurers to raise capital either in the form of equity or long-term subordinated bonds. The provision would also allow for dilution of government equity in the insurance companies to either 74 or 51 per cent.
Bonds issue
Insurers are currently not allowed to issue bonds, though globally insurers raise capital through such bonds. The sources said that the amendments to GIBNA were now before the Group of Ministers. Currently, the Government holds the entire paid-up equity capital amounting to Rs 550 crore in the four non-life insurance companies, after General Insurance Corporation transferred its holdings in 2004.
The sources said that insurers have for long been pushing for improving the capitalisation, either through direct induction of equity from the government or through an enabling provision in the statute.
The sources said that this was essential for them to raise their solvency. Although all the 4 PSU insurers - New India Assurance Company Limited, National Insurance Company Limited, Oriental Insurance Company Limited and the United India Insurance Company Limited - are well within the prescribed solvency margin, most of them had been hit by the decline in premium collections during the last few months.
The prescribed solvency margin is currently 150 per cent. Solvency margin implied the excess of capital (equity plus general reserves) and the value of assets over the insured liabilities. Besides, sources also said that proposals to improve their capital through sell-off of equity assets had been shelved , after the equity markets dropped sharply.
Divestment
Consequently, the strongest of the four insurance companies was likely to be picked up for divestment this financial year itself. One divestment was also expected serve as a price discovery mechanism for general insurance companies for the rest of the PSU insurers. Currently, there are no insurance companies listed on the domestic stock exchanges.
The sources said that divestment would help the companies raise their solvency ratios to above 200 per cent. The improved solvency margin would in turn allow the companies to aggressively pursue a premium growth of at least 10 per cent per annum. Besides, the sources said, the capitalisation would also help reduce the reliance on foreign reinsurance, for meeting the solvency.
Sources said that this year, with the PSU insurers switching focus from top line to bottom line, private sector insurers had increased their market share to about 42 per cent in the first quarter of this financial year. Besides, private sector companies such as ICICI Lombard have shifted from corporate and big ticket insurance business to retail business where the loss ratios were low. The consequent high retentions made retail lines highly profitable, where PSU insurers are not yet large players.
The proposal was to insert an enabling provision in GIBNA that would allow PSU insurers to raise capital either in the form of equity or long-term subordinated bonds. The provision would also allow for dilution of government equity in the insurance companies to either 74 or 51 per cent.
Bonds issue
Insurers are currently not allowed to issue bonds, though globally insurers raise capital through such bonds. The sources said that the amendments to GIBNA were now before the Group of Ministers. Currently, the Government holds the entire paid-up equity capital amounting to Rs 550 crore in the four non-life insurance companies, after General Insurance Corporation transferred its holdings in 2004.
The sources said that insurers have for long been pushing for improving the capitalisation, either through direct induction of equity from the government or through an enabling provision in the statute.
The sources said that this was essential for them to raise their solvency. Although all the 4 PSU insurers - New India Assurance Company Limited, National Insurance Company Limited, Oriental Insurance Company Limited and the United India Insurance Company Limited - are well within the prescribed solvency margin, most of them had been hit by the decline in premium collections during the last few months.
The prescribed solvency margin is currently 150 per cent. Solvency margin implied the excess of capital (equity plus general reserves) and the value of assets over the insured liabilities. Besides, sources also said that proposals to improve their capital through sell-off of equity assets had been shelved , after the equity markets dropped sharply.
Divestment
Consequently, the strongest of the four insurance companies was likely to be picked up for divestment this financial year itself. One divestment was also expected serve as a price discovery mechanism for general insurance companies for the rest of the PSU insurers. Currently, there are no insurance companies listed on the domestic stock exchanges.
The sources said that divestment would help the companies raise their solvency ratios to above 200 per cent. The improved solvency margin would in turn allow the companies to aggressively pursue a premium growth of at least 10 per cent per annum. Besides, the sources said, the capitalisation would also help reduce the reliance on foreign reinsurance, for meeting the solvency.
Sources said that this year, with the PSU insurers switching focus from top line to bottom line, private sector insurers had increased their market share to about 42 per cent in the first quarter of this financial year. Besides, private sector companies such as ICICI Lombard have shifted from corporate and big ticket insurance business to retail business where the loss ratios were low. The consequent high retentions made retail lines highly profitable, where PSU insurers are not yet large players.
Source: The Hindu Business Line
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