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Govt kickstarts merger process for 3 PSU general insurers

Apr 26, 2018

The government has held preliminary meetings to set in motion the proposed merger process of three state-owned general insurers, sources said.

The proposal for merger of Oriental Insurance, National Insurance Company and United India Insurance was announced in the Budget for 2018-19.

A couple of meetings have taken place but these are preliminary in nature, sources said.

The roadmap for the merger is yet to be laid out by the government, they added.

Finance Minister Arun Jaitley in the Budget speech had announced that National Insurance Company Ltd, United India Assurance Company Limited and Oriental India Insurance Company Limited would be merged into a single insurance entity and would be subsequently listed.

The three insurers together collected a total premium of about Rs 44,000 crore in 2016-17 and their combined market share was close to 35 per cent in the general insurance industry.

The merger of these three state-run insurers will lead to the creation of a mammoth non-life company and is expected to be a major contributor to the divestment target of Rs 80,000 crore set for the fiscal year 2018-19.

The profitability of most general insurance companies including the state-owned ones has been under pressure owing to rising underwriting losses and higher claims.

In 2017, the government listed two state-owned insurers New India Assurance Company Ltd and General Insurance Corporation of India.

Manage risk with cyber insurance

Apr 26, 2018

The recent spike in occurrence of cybercrime across the globe has made it obvious that it is no more a question of “whether” but a question of “when”. The average cost to the organisation of these breaches is estimated to be close to $5 million. Multiple analyst reports place the average cost per breached record between $78 and $277. This cost is attributed to investigation and remediation activities, notifications to be sent to customers and other stakeholders, change in credit worthiness, reputation management, legal fees and settlements and any regulatory fines arising from the breach. Add to this the intangible loss to the brand value and the change in customer behavior in response to the breaches.

Organisations no more have the luxury of imagining that they will not be targeted by malicious hackers. Remember that the hacks need not just target the data an organisation holds – the compromised systems can also be used to launch an attack on third parties it interacts with. In such a scenario, the organisation may be held liable for the damage caused to the third parties. While a commitment to security is must, it is impossible to make any system 100 per cent foolproof. As such, it has become inevitable for organisations across industries and sizes to develop a good cyber risk management approach.

A sound cyber risk management plan will include increased cyber resilience through response and recovery, contingency planning, and as a last resort mitigation and transfer of financial risk through cyber insurance. The cyber insurance market is still nascent, and even in the markets where take-up for commercial property and liability insurance approaches 100 per cent, cyber insurance is purchased by anywhere between 20 per cent to 35 per cent of businesses based on the industry and size of the organisation. The variation based on size and line of business indicates that the low adoption rate is because of a lack of awareness in the market.

An analysis of cyber-attacks over the last three years makes it clear that an organisation’s defense is only as strong as the weakest vendor they interact with. Hackers have launched attacks on Fortune 500 companies using credentials they got off vendors like air conditioning and food delivery companies. The substantial difference in procedures and protocols followed at large and small organisations forces the larger player to fall back on cyber insurance as a way to transfer the risk arising from the weak links they have little control over. It is no surprise that while the take-up rates have increased in both small and large organisations, the gap between the two segments has actually increased over the last three years.

The very act of applying for a cyber-insurance incentives behavioral change in an organisation. Simple desire to get the coverage at as low a premium as possible drives the organization to conduct gap analysis. The very first ask from underwriters is that all significant activities are logged against individual users and therefore login to the system are secure. Additionally, they require organisations to have disciplined procedures for patching software and put in place an incident response plan.

They would also want to know if vendor networks are monitored regularly. Organisations would want to measure upto industry benchmarks like NIST framework and ISO 27001 as that would result in lower cost of insurance.

Further, once a policy is purchased, the insurer is invested in keeping the damage from any cyber-attacks at the minimum. This results in an additional layer of security through monitoring and rapid response services provided by the insurer to their policyholders.

While correlated risks arising from software vulnerabilities (like the “Heart bleed” discovered in 2014) and scalability of sophisticated attacks used by hackers makes risk assessment especially difficult, insurers have developed complex statistical models to facilitate evaluation of potential consequences arising from different damage scenarios. This allows the insured to work out the best contingency plans and ensure that the critical services are up & running at the earliest possible in case of a breach, keeping the consumer backlash at minimum possible.

While cyber insurance cannot protect an organisation against reputation risk or replace strong security controls and information security programs, it does act as a last line of defense and mitigates most of the financial risks arising from a breach. Further, it also incentivises cyber security discipline across the organisation.

Will the merger of 3 general insurers make the new entity more competitive?

Apr 26, 2018

A quarter of a century after Independence, India began the experiment of consolidating its general insurance companies to underpin the growth of a largely government-owned, capital intensive industry. Another quarter of a century later, the process of liberalisation began as New Delhi began unshackling its state-controlled economy, integrating into the global economic order.

And nearly another quarter century later, the government has now decided to merge three of its unlisted general insurance companies to create a behemoth that it hopes would fetch it a better valuation and create a financially sound enterprise. For these companies, the oldest of which began operating in the then nerve centre of the British Empire, Calcutta, in 1906, the merger over the next two years is intended to create a sizeable government presence in the Rs 1.5-lakh-crore a year automobile, health and industrial insurance.

The proposed consolidation of National Insurance, United India and Oriental Insurance will decide the fate of 41,000 employees, 100,000 agents, 4.5 crore policyholders and 6,000 branches. Among the first casualties of a horizontal merger would be the elaborate layers of coordinating managements that have expanded over the preceding decades of independent existence for these companies.

“Three companies today have eight-nine regional offices and 200 other offices in Mumbai, which will not be required,” says Yogesh Lohiya, former chairman of GICNSE 1.11 % Re. “Around a third of the offices will have to be rationalised.”

To shore up operating performance, the three public sector insurance companies will have to reduce expenses and improve efficiency – the government will have to close down 2,000 to 3,000 branches and offices.

“The biggest challenge will be streamlining branches and manpower,” said Lohiya. “The government will have to come out with a voluntary retirement scheme to let people move out.”

But sales force and underwriting positions and claims departments may not be reduced drastically. There will be synergies in operational and maintenance departments. The technology department would shrink to have just one system.

“One-third of the branches will have to be closed down and once these branches are shut down, operational staff may see some reduction,” says Rajesh Dalmia, partner, EY.

The biggest challenge will be moving people out in the senior and mid-level management. They will have to map out the gradation system for promotions. While doing so, anomalies will surface which will lead to further delays. What does it do with 20 general managers and 45 deputy general managers in the three companies?

“This merger will take two years to happen,” said a chairman of a large public sector insurance company. “Solvency margins will not improve immediately.”

A solvency margin is the buffer that an insurance company has in assets over its liabilities. Real estate could hold key to government revenues at a valuation of nearly Rs 10,000 crore.


Solvency margins of these companies had fallen below the prescribed 1.5 times. It is the minimum prescribed surplus of assets over liabilities. National and United have raised debt to shore up their solvency requirements blurring the financial strength.

“Solvency is not going to improve on day one of the merger,” said Alpesh Shah, senior partner, The Boston Consulting Group. “There are positive synergies as the merged entity will be the number one player and will have clout with partners, e.g. OEMs and banks as well as with employees, hospitals, and all other stakeholders. But there will be a real challenge in realising the synergies, with the technology challenge involving three different systems.”

As a result of lower solvency, these companies have been writing more retail health and motor policies, which have low capital requirements and are losing out on the bigger industrial covers.

Also, these companies have substantial real estate, which are not used in calculating solvency requirement. These state-run firms are financially stronger than banks that have been hobbled by bad loans. Unlike state-run banks, the government does not need to capitalise general insurance companies every year.


General insurance companies are struggling to report profit from core underwriting business. The only exception is Bajaj Allianz General Insurance. The merger of the three leading public-sector insurance companies will create the largest general insurance company that will drive economies of scale. They will jointly command 31% market share. New India AssuranceNSE -0.67 % will become the second largest with 15.05% market share with private sector as a whole having a 54% market share.

The public sector insurance companies reported a combined underwriting loss of Rs 15,591 crore in 2016-17. Whether the merger will help in lowering losses from core operation will depend on how the merged entity goes about cutting costs. These three companies are bleeding and have low reserves. To boost reserves, the government has to invest capital.

The three companies will have to focus on lowering commission and operating expenses, which are a major part of the total expenses. so that policyholders do not suffer.”


If consolidation is to improve efficiencies, the ultimate aim of a shareholder is to monetise assets. The government, which has been struggling to make ends meet, aims to list the combined entity.

But a lot has to be done given the lack of investors’ response to the IPOs of two companies — New India Assurance and the national reinsurer GIC Re — which had to be bailed out by Life Insurance Corporation. While New India is trading 20% below the IPO price, GIC Re is down 28%.

This does not mean that there would be no takers, but the pricing and the market conditions would make a difference. It may also be all about packaging like the way newage companies in the digital and startup world do.

“It is like large internet companies that do not make money on day one but they still are getting good valuations. Future demands are more valuable than the present book,” says Dalmia of EY. “Postmerger, this entity will be the largest in the industry, commanding a premium. As the largest entity, it will have the wherewithal to manoeuver the market.”

A 15% divestment can fetch the government at least Rs 9,000 crore, an equity analyst estimates. The company may be valued at Rs 60,000 crore based on its investment book, net worth and real estate.

The merged entity will be an undisputed market leader with 1.6 times the size of New India, but to remain a meaningful and significant business entity, it has to deliver on many fronts – costs, growth and profitability.

Three GICs, National Insurance, Oriental Insurance, United India Insurance to be merged by March

Apr 26, 2018

In a meeting held on April 23, finance ministry officials asked the chairman and managing directors of the government-controlled non-life insurance companies to speed up the merger process of the three public sector general insurance companies (GICs) — National Insurance Co, Oriental Insurance Co and United India Insurance Co.

The government wants the merger to be completed by March 31, 2019. In the Union Budget on February 1, 2018, finance minister Arun Jaitley had proposed the merger of these three PSU general insurers and said the unified entity post the merger could be listed on the stock exchanges.The government had cited financial weakness as the primary reason behind its decision for the proposed merger of GICs.

The combined entity would hold 32% of the total market share, which will be nearly double of New India Assurance Co that has a total market share of 15.06%.

Initial estimates suggest that this will be the largest non-life insurance company valued at about Rs 1.2-1.5 lakh crore.

During the meeting, the decision to open tenders for the appointment of external consultant agency along with terms and conditions for the consultant was also taken.

The appointed consultant will supervise the whole process and would be responsible for preparing strategies for the merger of GICs and simplify the issues related to it.

The consultant will be assisted by a committee of 20-30 high-ranked officers from all the three companies to supervise the merger process.

The consultant will also be responsible to look into the balance sheet, IT and employees of these companies. However, before kicking starting the merger of these PSU GICs, the government will have to amend the existing General Insurance Business (Nationalization) Amendment Act 2002.

A senior insurance official who attended the meeting said, “Government has given a deadline to complete the merger by March 31, 2019, as from April 1 there should be a single merged entity, and within a month tender with terms and condition for the external consultant will be notified.”

The senior official said, during the merger process, companies will have to close a number of existing insurance products to avoid duplicity for which IRDA’s approval is required.

The regional offices of these insurance firms will be cut down by half, i.e. there will be 45 offices instead of the current 90.

Further, the database will have to be revamped.

India To Spend Rs 16,717 Crore On Modi’s Health Insurance Plan In Two Years

Apr 25, 2018

India plans to spend about Rs 16,717 crore in the first two years on the free health insurance programme that offers cover for 10 crore poor families.

“The centre’s share will be Rs 10,498 crore and the states will spend around Rs 6,219 crore,” Alok Saxena, joint secretary in the Ministry of Health and Family Welfare who has been supervising the rollout, told BloombergQuint in a written reply. In the first year, the government will spend Rs 2,800 crore and states’ will pitch in Rs 1,700 crore. They will contribute Rs 7,300 crore and Rs 4,500 crore, respectively, in the second, he said.

Prime Minister Narendra Modi’s National Health Protection Scheme aims to cushion the poor from healthcare costs as insurance penetration is low at 3.49 percent in India against 6.28 percent globally. About 62 percent of the medical expenses are paid out of pocket by Indians, according to World Bank data. That, according to government’s think-tank NITI Aayog, pushes nearly 70 million people into poverty each year in a country that spends 1.4 percent of its GDP on healthcare—the lowest among BRICS peers and also below the global average of 5.9 percent.

About 43.8 crore people were covered under various health insurance schemes in the country as of March 2017, according to a report by global ratings agency Crisil. That included 33.5 crore under various government-sponsored schemes including the Rashtriya Swasthya Bima Yojana. “With the new scheme, the coverage will increase to more than 65 crore people.”

The plan offers an insurance of Rs 5 lakh for every family, and covers over 1,200 procedures, including all secondary and most tertiary ailments such as diabetes, all types of cancer and heart diseases. Saxena said states will be given the autonomy to reserve certain complex procedures, such as obstetrics and gynaecology, to public hospitals.

In addition to the overall allocation, the government approved a spend of Rs 350 crore for setting up a national-level institution to set up and run the Ayushman Bharat National Health Protection Mission. The institute will be responsible for creating awareness, developing IT systems and managing administrative costs, he said.

Optional For Private Hospitals

The plan, which intends to provide free healthcare to over 50 crore people living below the poverty line, will mostly be run by government hospitals that will be part of the scheme from day one.

Private hospitals can choose to join by registering online. “Once private hospitals empanel themselves, they will have to provide treatment at our rates,” said Saxena.

The IT platform to implement the insurance scheme will be ready and tested by July. “Everything else is ready and the launch date will be decided by the government anywhere between August and October.”

States will have the option to run the scheme either via insurance companies or on a trust-based model. “The premium rates, however, will only be discovered once we begin the tender process for insurance companies in May,” said Saxena. The states can implement the scheme in this year or the next depending on their preparedness and contractual obligations towards their existing health insurance programmes, he said.

“There will be different cost structures for different states, therefore the premium outgo per family for each state will also vary accordingly,” said Sanjay Datta, chief, underwriting & claims, at India’s largest private general insurer ICICI Lombard General Insurance Company.

Apart from the rising medical costs, said Sandeep Patel, managing director and chief executive officer of Cigna TTK Health Insurance, other factors such as age, gender, zone of cover, add-on benefits and health status of individuals will impact premium rate quotations.

What Happens To State Schemes?

States like Andhra Pradesh, Telangana, Karnataka, Gujarat, Tamil Nadu, Maharashtra, Kerala, Meghalaya, Chhattisgarh, Goa, Dadra and Nagar Haveli, Arunachal Pradesh and Puducherry already have similar health insurance covers.

States will continue with their plans as before, except for the families below the poverty line identified under the socio-economic and caste census of 2011, according to Saxena. Those will now be covered under the nationwide plan.

“Integration is not the way to do it. State and national schemes will work in partnership with each other,” said Saxena. States can take a call on whether they want to continue with their cover of Rs 1.5-2 lakh or increase it for the families not to be covered under the national insurance plan, he said.

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