What to expect from the privatization of Insurance Business before banks?

The general insurance company has received a capital infusion of approximately Rs 12500 crore from the Indian government.

Ankit Awasthi
Published on 16 Aug 2021 10:18 AM GMT
What to expect from the privatization of Insurance Business before banks?
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Privatization of Insurance Business before banks

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The announcement regarding the privatization of the insurance business is making headlines. According to sources quoted by CNBC TV18, the government may decide to privatize United India Insurance shortly. Following receipt of the required approvals, the government will submit them to the cabinet. According to sources, the government will privatize the insurance company first, followed by the banks. The general insurance company has received a capital infusion of approximately Rs 12500 crore from the Indian government.

Privatization of Insurance Business

Both the House of Representatives and the Senate recently passed legislation regarding the privatization and disinvestment of the insurance company. President Ram Nath Kovind has given his permission for the changes, and the government has published notifications for both of them. The government presented the General Insurance Business Nationalization Amendment Bill, 2021, as well as the Deposit Insurance and Credit Guarantee Corporation (DICGC) in the House of Representatives during the monsoon session. Even though the insurance amendment legislation was approved by voice vote, it created considerable concern in the House.

A notification has been issued regarding the Insurance Amendment Bill, 2021

The General Insurance Amendment Bill gives the government the authority to decrease its share in government insurance firms from 51 percent to 50 percent under certain conditions. As a result of the DICGC amendment law, bank account holders have now covered up to Rs 5 lakh. This implies that if the bank fails for whatever reason, depositors would get a maximum of Rs 5 lakh in compensation. Previously, it had a maximum of Rs. 1 lakh. Depositors will get the advantage of guaranteed insurance within 90 days of the passage of the new legislation.

Four businesses provide general insurance

At the moment, four insurance firms are operating in the government sector. National Insurance Company Limited, New India Assurance Company Limited, Oriental Insurance Company, and United India Insurance Company. Any one of these four businesses will be sold off to a private equity firm. For the time being, no firm has been chosen for the position. United India Insurance, according to the most recent information, is at the forefront of the industry. The government has set a target of Rs 1.75 lakh crore for disinvestment and privatization in the current fiscal year. The Finance Minister announced the privatization of two public sector banks and one insurance firm when he presented the Budget on February 1.

Two reasons tilted the field against public insurers. While the Insurance Regulatory and Development Authority of India (IRDAI) has increasingly operated as a broker, private firms' aggressive commercial tactics have put public sector insurers at a disadvantage. For example, the establishment of Motor Insurance Service Providers (MISP) has enabled private insurance firms to compete with public sector insurance companies. For example, unions claim private insurers ignore limits on commissions paid to car dealers, whereas public firms do. Other industries, including health insurance, have similar problems, with firms paying brokers commissions well above the IRDAI's cap. The union's claim the IRDAI's inability to examine private insurance firms' activities or levying small penalties when it does has enabled them to parody the rules. They want experienced external auditors to conduct forensic audits of private insurers' automobile insurance operations.

In a recent letter to the Vice-Chair of NITI Aayog, the National Confederation of General Insurance Officers' Associations said that rather than selling the firms completely, they should be consolidated. Privatization is the main method of forcing a consolidation. According to IRDAI data, New India Assurance, United India Insurance, and Oriental Insurance accounted for almost one-third of the Indian general insurance market in June 2021. Including the National Insurance Company, the public sector's market share is about 42%. In reality, only ICICI Lombard has a market share similar to the public sector. This demonstrates the fragmentation of the general insurance market, with over 30 firms vying for a little share of the pie. Privatization is being used to increase the market for private companies from this vantage point.

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Ankit Awasthi

Ankit Awasthi

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