Consultant Ernst & Young, that had bagged the deal to devise detailed strategies for the merger of the three state PSU general insurance companiesm, will be paid a fee of around Rs 60 crore and has been asked to complete assignment in the next 18 months, by the first quarter of FY 2021.
With E&Y getting 18 months time frame for preparing the basic strategies, the deadline for completing full merger of three companies, National Insurance Company(NIC), Oriental Insurance Company(OIC) and United India Insurance (UII). with all its legal, IT and operational complexities, will be easily extended into FY 2022, said officials of three PSU general insurers.
Earlier GIPSA, the official association of four PSU general insurers and reinsurer GIC Re,has given its stamp of approval to the E&Y deal after three member panel of general managers representing three merged companies decided to award the merger contract to E&Y over Boston Consulting Group(BCG) and Oliver Wyman, a part of the Marsh & Mclenan Group .
`Now, the last step, the approvals from the ministry of finance(MoF) for E& Y undertaking the assignment is being awaited upon and is expected at any moment.
Effectively, E&Y may commence the assignment in a month or two and should be able to complete ii the first quarter of FY 2021.
However, the MoF is keen that the assignment should be completed in 15 months, by the end of FY 2020.
“Though, officially, E&Y is being given 18 months, Debasish Panda, additional secretary, Ministry of Finance , who is supervising the merger pf three insurers, wants the E&Y assignment to be completed by the end next fiscal,'' said sources in the PSU general insurance industry.
Integrating the existing three different IT systems, which these companies currently have, is one of the toughest tasks, among other issues, for achieving a smooth merger and functioning of the merged entity, said officials of these companies.
Meanwhile, the three merging entities are grappling with solvency problems as currently, they don’t have minimum solvency of 1.5 per cent. All of them are waiting for some capital from the government to boost their solvencies and pursue their growth plans.
These companies which had recorded high underwriting losses due to higher provisioning against future long tail claims, have estimated that they would be needing over Rs 8000 crore to return to the solvency ratio of 1.5 per cent.
“At least, we expect Rs 2000 crore from the government to do our business smoothly. Currently , we have been running our day to day business with the special regulatory support from the IRDAI and reinsurance support from the GIC Re,’’ said officials from these companies.
Though , the central government has recapitalised the PSU banks with massive funds, it hasn’t given a single penny to the PSU general insurers, though these companies have paid a good amount of dividends to the government regularly over the decades, said analysts.
Once it happens, the merged entity will be the largest entity with 31 per cent market share when compared to the 14 per cent market share as being enjoyed by New India Assurance.
Union Finance Minister Arun Jaitley in his FY 2018-19 Budget speech had announced that the three companies would be merged into a single insurance entity .
The process of merger is likely to be completed during the current fiscal, he had said.
E&Y is expected to advise on organisational restructuring, rationalisation of human resources, management of operational issues, regulatory and compliance issues, it said.
It is expected to handhold the management of all the three companies, throughout merger process till the new organisation is formed and set in place, it said.
The consultant has to suggest an action plan with broad time lines to bring all the three into a single merged entity, with a new name, logo and a new Head Office.
It will also work out a scheme for rationalization of offices, merger and unification of offices,creation of new organizational structure. The new entity should assimilate all the individual geographical dominance.