2020-07-08 18:32:00
insurance companies

NEW DELHI: The Union Cabinet, headed by Prime Minister Narendra Modi, on Wednesday approved infusion of 12,450 crore into three public sector general insurance companies — Oriental Insurance Co. Ltd, National Insurance Co. Ltd and United India Insurance Co. Ltd. Out of the total amount approved, 9,950 crore will be infused in the current fiscal.

While 3,475 crore will be released immediately to the three companies, the remaining 6,475 crore will be infused in one or more tranches. To give effect to the infusion, the authorised capital of National Insurance Co. Ltd will be increased to 7,500 crore and that of United India Insurance Co. Ltd and Oriental Insurance Co. Ltd to 5,000 crore each.

The capital infusion into these insurance companies is critical so that the solvency ratio becomes acceptable and meets the criteria of Insurance Regulatory Development Authority of India (IRDAI). According to the regulator, all insurers need a minimum solvency ratio of 150%. Solvency ratio is a key metric that indicates a company’s ability to repay debt.

“The capital infusion will enable the three PSGICs (public sector general insurance companies) to improve their financial and solvency position, meet the insurance needs of the economy, absorb changes and enhance the capacity to raise resources and improved risk management,” an official statement said.

“This is a programme of recapitalization of insurance companies so that they become more stable and strong,” union minister Prakash Javadekar said in a media briefing. The minister did not disclose how much each insurance company will receive.

Meanwhile, the process of merger of the three state-owned insurance companies has been “ceased” and the focus will be on their solvency and profitable growth, post capital infusion, amid coronavirus-related uncertainty.

To ensure optimum utilization of the capital being provided, the government has issued guidelines in the form of key performance indicators or KPIs to bring business efficiency and profitable growth, the statement said.

According to the 2020-21 Union Budget, the plan was to infuse 6,950 crore into these three companies in the current financial year. In February, the Cabinet had infused 2,500 crore in the light of the “critical financial position and breach of regulatory solvency requirements of three public sector general insurance companies”.

“This is a timely and positive step which was imperative from a solvency standpoint. The companies will however need to embark on a transformation journey to get on a path of sustained profitability,” Sandeep Ghosh, financial services advisory lead, EY said.

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