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Insurance policy

10 November 2011 By Jeff Glekin

Cash-strapped New Delhi is mulling the part privatisation of four state-owned general insurers. Though sound in principle, practical problems will accompany such welcome moves. As with many other state-owned assets, there’s a tonne of preparatory work to be done before the firms can contemplate a float.

The Indian non-life insurance market has huge potential for growth. Premiums account for only 0.9 percent of GDP compared to 3 percent in Europe and 1.6 percent in Asia. That is an opportunity that is likely to create investment enthusiasm for the IPOs.

But Indian insurers have focused too much on growth and taken their eyes off profit margins. All of the government-owned firms rely on investment income to balance the cost of claims. That’s a bad habit that the companies would do well to get rid of before listing.

Competition is also stiff. Having controlled the entire market 10 years ago, these four firms now account for only 58 percent of premiums written. Listing should give managers better incentives to steady the relative decline. But the challenge is there.

Some reform of the insurance market may also be necessary. For example, premiums on third-party motor cover are fixed by dint of regulation. That’s awkward, since the liabilities are unlimited. Third-party cover for commercial vehicle costs insurers 190 rupees in claims for every 100 rupees of premium. If the government wants these companies to succeed as separately quoted business it may have to step back from such controls.

In addition, the sector has a worrying legacy problem. The pool of money set aside to pay for third-party losses is under provisioned. This could land the four government firms with a combined bill of $2.3 billion this year.

These firms are not huge and would make only a modest impression on in India’s national finances. They are also hard to value. Together, however, they have assets of about $6 billion. But the economic impact of a more vibrant insurance market could bring wider benefits to India’s economy. To boost the impact, New Delhi should maximise the size of the stakes they are willing to sell.

It may be too much to hope that New Delhi will sell stakes of 25 percent or more. Investors might be happier, and willing to pay a higher price if the government sells off more than the paltry 10 to 15 percent that is currently expected.


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