In its latest Financial Stability Report, the Reserve Bank of India noted that three state-owned insurance companies are not meeting regulatory solvency requirements. Within the public sector non-life insurers’ group, the solvency ratio falls below the desired level, with three out of four PSU insurers recording ratios beneath the regulatory threshold.

The Insurance Regulatory and Development Authority of India (IRDAI) stipulates a minimum solvency ratio of 150 per cent for insurance companies emphasising the importance of a higher ratio for ensuring the insurer’s capacity to meet its liabilities.

The solvency margin represents the additional capital companies need beyond the expected claim amounts, serving as a financial cushion in critical situations to facilitate the settlement of all claims. In 2022, the government injected ₹5,000 crore capital into three insurers — National Insurance Company Ltd, Oriental Insurance Company Ltd, and United India Insurance Company.

This strategic move was part of the government’s playbook, acknowledging the challenges posed by the unprecedented pandemic. Notably, the Budget for 2023-24 does not allocate funds for capital infusion into insurance companies.

Funds infusion

Earlier this year, three PSU general insurers (excluding New India) were estimated by an ICRA report, to require a substantial ₹17,000 crore to meet solvency criteria. The preceding year witnessed an upturn in underwriting losses for public sector insurers, attributed to wage revisions and the settlement of associated arrears.

Among the four state-run general insurance companies, only New India Assurance Company is publicly listed, while the other three are entirely owned by the government. Despite the government’s intention to privatise one general insurance company and the parliamentary approval of amendments to the General Insurance Business (Nationalisation) Act (GIBNA) to facilitate it, there has been no progress.

In February 2018, the government announced the proposed merger of three PSU General Insurers — National Insurance (NIC), United India Insurance (UII), and Oriental Insurance (OIC) — into a single entity before being listed on Indian stock exchanges. However, this plan was called off in July 2020.

Earlier, IRDAI identified LIC, GIC Re, and NIA as Domestic Systemically Important Insurers (D-SIIs). Despite being subjected to enhanced regulatory supervision to address systemic risks and moral hazard issues, these entities were instructed to elevate corporate governance and establish a robust risk management culture. However, there has been a notable lack of progress. Considering the prolonged financial challenges faced by PSU insurers, one questions the significance of such a SIFI nomenclature.

Conflict of interest

Despite a significant deficiency in risk management and a prolonged low solvency margin, the regulator seems unable to take decisive action. The absence of incentives for management to pursue a turnaround is evident, and there are no anticipated regulatory penalties or consequences given their state-owned status. In a hypothetical scenario involving a private insurer, the regulator might have facilitated a merger or acquisition with a more robust insurer.

Another complicating factor is that PSU insurers have been subject to governance processes mandated by the government’s administrative ministry since their inception. The inconsistent approach makes it challenging for improvements to take effect. Presumably, until the conclusion of national elections, the political volatility hinders decisive action on these struggling PSUs. The harsh reality is that additional taxpayer funds may be required to sustain these entities until a decision is reached.

Following 50 years of insurance nationalisation, government companies can no longer assert to be solely driven by social purpose considerations, potentially conflicting with policyholders’ interests. Therefore, it is imperative that all PSU insurers transition to a professional set-up, free from day-to-day administrative ministry control. These entities must prioritise accountability to policyholder interests, reflecting the core principles of insurance governance.

The writer Policy Researcher & Corporate advisor