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The government is de-merging three large-scale general insurance companies into smaller units after the merger plans faced drawbacks in the insurance sector. The focus is on the sales strategy of a few private sector operations.

Three insurance companies National Insurance Company, United India Insurance Company and Oriental India Insurance Company were merged by the Finance Ministry earlier to be named as New India Assurance.

The de-merger plan was brought forward after a series of stakeholders meetings. This is one of the options with the Finance Ministry to make state-owned units focus on increasing the insurance inclusion in the country.

"The idea to merge PSU insurers is fraught with problems as one giant entity would be difficult to administer and manage. Moreover, this might lead to branch rationalization/closure and major job losses in the sector," reported IANS.

A fresh assessment of the privatisation of some of the insurance works could be made by outsourcing them to strategic investors. This can be used for better valuations and undertaking sales of smaller units. The smaller units, however, might also help to increase regional branches and improve insurance growth.

De-mergers | Representational Image

"De-merger of big-size PSUs into smaller units, on the other hand, would enable ease in administration and a further increase in reach of these to the masses with improved and more effective focus and management," IANS reported.

The government had announced the biggest-ever merger of three public sector general insurance firms in the Budget 2018 in the insurance sector valued at Rs 1 lakh crore and intended to complete it by FY19.

However, since the bill encountered hurdles, the plan was stopped after the Department of Financial Services (DFS), which looks into the operations of state-owned insurance firms, wrote to DIPAM. They asked DIPAM to examine the proposal afresh and solve complex operational issues first rather than going ahead with the plan in haste.

The poor financial health of two out of three insurance companies that continues to remain in losses could be the biggest problem. In September last year, the three companies recorded a total loss of Rs 1,800 crore and some of them even lost their market share. In fact, insurers' market share of public service undertakings has fallen from 56 per cent in FY13 to 51 per cent in FY18.

To strengthen the units, the government has also directed the firms to monetize their assets such as real estate to raise revenues. It is assumed that the support of Rs 4,000 may also come from the Centre for insurance companies. The insurance market is built of 27 companies including the four major PSUs, 23 private players and six are individual health insurers.

India's insurance density and penetration, as compared to the world average density of Rs 45,227 and penetration of 6.13 per cent, is Rs 5,079 and 3.69 per cent, respectively. As for the general insurance sector, penetration is less than 1 per cent.