"The set-up adopted by government at the time of nationalisation of general insurance business was that of a holding company and four subsidiaries. However, the expectation that the subsidiary companies would provide effective competition to each other has been largely belied ..." - Malhotra Committee on insurance sector reforms

Even as the issue of restructuring the Rs.9,000-crore premium income, general insurance sector is pending serious consideration the General Insurance Corporation has sprung a surprise by its recent decision to float two new subsidiaries -- one to manage health insurance (group healthcare schemes, to start with) and the other to transact crop insurance.

As per Malhotra Committee's recommendations, the new managed health care company will have an equity base of Rs.100 crore and will start operations once a new government at the Centre gives its stamp of approval. The new company would also devise health insurance products to be marketed by the existing four underwriters! As far as the proposed crop insurance subsidiary is considered, GIC will spin off the crop insurance cells of its four subsidiaries into a separate company.

While the move to float a separate company to manage crop insurance has been recommended by the Malhotra Committee, floating a separate company to transact health care schemes has come as a surprise to many when the demand is to restructure the present set-up before the industry is opened up.

Change is imminent
For the uninitiated, the National Insurance Company Ltd, New India Assurance Company Ltd, Oriental Insurance Company Ltd and United India Insurance Company Ltd are the four insurers who underwrite risks other than life and, apart from governing them, their holding company GIC restricts itself to accepting aviation risks.

After several years of debate a consensus has been reached amongst the political parties, barring the leftists, on liberalising the sector. The recent government move to allow registration of insurance companies by the registrar of companies is proof of current political thinking on this subject.

It is expected that the Insurance Regulatory Authority Bill will most likely to get Parliament's approval once a new government is installed at the centre. Meanwhile, the Insurance Regulatory Authority, or IRA, is busy preparing the ground rules to hasten the entry of private players.

Indian giants are pygmies
Already several Indian corporate groups have signed joint venture agreements with foreign insurance giants. When one compares the financial strength of foreign insurance companies with that of their Indian partners, the local partners look like pigmies. In fact, even the "big" domestic insurance companies look small too.

Consider this. Standard & Poor's ranks the Rs.2,000-crore premium income United India a mere 150th amongst the top 200 global business insurers, based on 'non-life net premium written'.

So what does liberalisation of the sector portend for public sector insurers? According to estimates, once the private sector is allowed, the nationalised insurance companies would initially loose about 15 per cent of their business. Clearly, the loss will be heaviest at the top end of their business portfolios. And, once de-tariffing (freeing rate controls) is done, the public sector companies are likely to loose more in any rate war that ensues.

Precious time lost
Faced with this obvious threat, GIC in its submission to the government's standing committee on finance suggested consolidation of its current operations in one of the following ways to strengthen the government-owned insurance companies:

• merger of all four companies into one
• all four companies to be made independent
• continue with existing structure with cross holdings
• allow one company to take care of the insurance requirements of corporate sector and others to carry on personal lines of business, and
• each company to operate on a regional basis

Given this position, if you want to know the source of GIC's idea for a separate health insurance company, the answer lies in its vision document called Vision 2001. Among other things, this blueprint for restructuring general insurance suggests creation of speciality offices to focus on particular lines of business. Though the vision document advised a three-phased restructuring exercise couple of years ago, GIC is yet to implement the major prescriptions, and has lost precious time.

Unless the concerned officials in New Delhi pull up their socks and reorganise the sector, the insurance companies will have a tough time in the future. Right now, GIC's suggestion of merging its four subsidiaries into one and hiving off its reinsurance business as a separate outfit looks to be winning formula.

Advantages of size
The consolidated figures of GIC and its subsidiaries support such a view. Provisional figures for the year 1998-99 show GIC's free reserves as Rs.6,450 crore, net worth Rs.7,361 as crore, technical reserves as Rs.14,087 crore, investment income as Rs.2,350 crore, and total investments Rs.19,000 crore. All this on a paltry equity of Rs.375 crore! A relatively large organisation like this will be in a better position to leverage its investment portfolio to attract business.

The other major benefits that would accrue if the GIC network merges into one entity are: higher underwriting and risk retention capacity; increase in reinsurance premium; reduction in reinsurance outflow; healthy solvency margins; setting right the asset/liability mismatch, and reduction in costs.

For example, one visible avenue for savings is the rent outflow. Currently all four insurers and GIC operate from about 4,150 offices, most of them rented ones. If they merge, the duplication of branches would vanish, resulting in huge savings.

A question of redeployment
K.N. Bhandari, chairman and managing director, United India Insurance, doesn't subscribe to the merger idea. He thinks it is more important to have a broad-based autonomous board of directors which is free to take decisions on product design and pricing, organisational restructuring, etc.

What about the trend of global insurance majors merging? Mr Bhandari says, "The world over mergers are for reducing manpower and costs. However, here one cannot think of cutting down on human hands."

On the other hand, N.M. Sundaram, general secretary, All India Insurance Employees' Association, advocates amalgamation of all four insurance companies into one. He says, "As far as we are concerned, merger of branch offices to cut down costs is welcome. However, the general insurance industry is registering an annual growth rate of 15 per cent. And growth needs human hands to service the clients."

If reduction in manpower cannot be achieved even after an attractive early retirement scheme, then redeployment of excess hands, say, in marketing insurance products can be attempted, say industry sources. This, according to the proponents of the merger move, would help the merged company to grow and simultaneously reduce the expense ratio to much below the required cap of 19.5 per cent from the current level of 26.81 per cent. Incidentally, GIC's attempt to convert clerical staff with an aptitude for marketing has got into legal tangle.

Be that as it may, after the merger of four underwriters into one company that would underwrite aviation risks too, and hiving off of GIC's reinsurance business to GIC Re Ltd, GIC's current holdings in its subsidiaries could be transferred to a new entity called GIC Holdings Ltd.

The new holding company could, in turn, offload its stakes in the merged entity to the public at a premium at a sutiable time. Remember, the Union finance ministry recently asserted that the government will not infuse any additional capital into GIC or its subsidiaries. Why, the government could, at some stage later, offload its stake in GIC Holdings and complete the cycle of restructuring.

Simultaneously, GIC should not forget that financial institutions are moving towards the concept of universal banking, and are offering all kinds of financial services under one roof. organisations like ICICI, the Industrial Development Bank of India, and the State bank of India have announced plans to start insurance operations.

Both ICICI and IDBI grabbed banking licences when the Centre decided to allow new-generation private banks, while GIC, unfortunately, failed to even apply for one. ICICI, apart from banking sector is also a major player in the non-banking financial services segment.

Given this background, GIC should think ahead and try to consolidate its strengths rather than throw away its gains. Like it or not, in business it is the mightiest who survive in the long run.