IB coming up with merger guidelines for insurance cos

KATHMANDU, MAY 26 -

After the central bank, the Insurance Board (IB) too is preparing merger guidelines to promote merger between insurance companies.

The insurance sector regulator has planned to hold a stakeholder meeting soon, in which it plans to table the proposed merger guidelines for discussion. Compared to the Nepal Rastra Bank (NRB), IB started late to prepare the guidelines although the government adopted the policy of encouraging merger in last fiscal year’s budget.

“The new guideline is expected to encourage insurance companies to go for merger, as the guidelines have also provisioned merger incentives,” said IB Chairman Phatta Bahadur KC. “We will not force them to unite, but encourage them.”

According to KC, mergers between insurance companies have become essential as the number of insurance companies is large, but their premium collection is still moderate.

He said companies were not in a position to attract big businesses due to their small paid-up capital size. The current capital requirement for life and non-life insurance companies is Rs 250 million and Rs 100 million, respectively.

“Bigger paid-up capital would help companies attract the confidence of re-insurance companies abroad and do better deal with them on premium,” he said.

The board has proposed a paid-up capital of Rs 2 billion for life insurance companies and Rs 1 billion for non-life in the proposed Insurance Act.

KC believed that many companies would go for merger once the proposed bill is endorsed.

A few merger attempts were made in the Nepali insurance sector, but none of them were successful. The latest was the merger initiative between Shikhar Insurance, United Insurance and Prudential Insurance, but the plan was aborted before the signing of the memorandum of understanding.

A United Insurance official said the attempt could not be successful as one of the parties rejected the plan, citing disrespect from another companies.

About three years ago, there had been merger attempts between three non-life insurance companies, including Shikhar Insurance, Premier Insurance and Sagarmatha Insurance. But the plan was aborted after the companies failed to forge an agreement on ‘asset valuation’ and control over the merged entity. Sagarmatha had pulled itself out of the plan before the process started, while Shikhar and Premier parted ways later.

A Shikhar official said the main problem was on the valuation and control over the merged institution. Boards of both Shikhar and Premier had agreed in principle to the plan and assigned Beed Invest, a consultant firm, to conduct feasibility study. The study had also given a green signal for the merger. IB had mediated their merger talks.

With over two dozen insurance companies currently operating in the country, experts say mergers are inevitable. There are a total of 9 life insurance companies and 16 non-life insurance companies.

However, merger would not be an easy task, say experts. Former Executive Director at IB, Ramesh Raj Bhattarai, said ego problem among directors is the main obstacle to mergers between insurance companies. “It is necessary to increase the paid-up capital of insurance companies to increase their risk bearing capacity,” he said. “Merger can be an option for this.”

He, however, said increasing paid-up capital through merger alone would not solve the problem. “Insurance companies need

dynamic and professional human resource,” he said.

He was also of the view that as long as there are reinsurance companies sharing risks, domestic insurance companies would not face major problems like those faced by banks and financial institutions.

Source: The Kathmandu Post