A token capital may be provided as early as the upcoming budget on 1 February, they told Mint.

The capital infusion would help improve the financial health of the state-backed general insurance firms, one of the persons mentioned above said.

The recapitalization will also help improve their solvency ratio, a key parameter that indicates a financial buffer to settle all claims in extreme situations, the person added.

There are four state-backed general insurance firms—National Insurance Co. Ltd, Oriental Insurance Co. Ltd, United India Insurance Co. and New India Assurance.

The solvency ratio of three of the four companies was negative at the end of the March quarter of FY23. The ratio of an insurance company compares the capital it has to the risk it has taken on.

According to the Insurance Regulatory and Development Authority of India (Irdai), the minimum solvency ratio insurance companies need to maintain to lower risks should be 1.5.

The solvency ratio of National Insurance Company Ltd, Oriental Insurance Company Ltd, and United India Insurance Company stood at -0.29, -0.69, and -0.29, respectively, at the end of Q4 FY23.

The solvency ratio of New India Assurance stood at 1.87 during the above-mentioned period.

However, despite being largely loss-making in FY23, some state-owned general insurers reported profits in the recent quarter.

During Q2 FY 24, United India Insurance Company Ltd declared a profit of ₹204.30 crore, while National Insurance Company Ltd made a profit of ₹44.82 crore for the first half of the current fiscal from a loss of ₹1,768.46 crore in the year-ago period.

Oriental Insurance Company Ltd slashed its first-half loss to ₹42.17 crore from a net loss of ₹3,586.93 crore during the first half of FY23.

However, the New India Assurance Company Ltd reported a loss of ₹199.99 crore for the second quarter of FY24 from a profit of ₹260.23 crore posted during Q2FY23. Earlier this fiscal, the government had planned to infuse ₹4,000 crore– ₹5,000 crore in state-owned general insurers. But this didn’t materialize, and the government is now likely to recapitalize these companies in the next fiscal.

In her Budget 2021 speech, finance minister Nirmala Sitharaman announced strategic divestment plans for two banks and an insurance company. But the process is yet to move ahead. Though the insurer’s name has not been finalized, government think tank Niti Aayog has recommended privatizing United India Insurance.

Privatizing an insurer will be easier for the government now, since Parliament has amended the General Insurance Business Nationalization Act, allowing it to dilute its stake in a general insurer below 51%.

The Centre was earlier working on a proposal to merge public sector insurers. The plan was to merge National Insurance Company, United India Insurance Co. and Oriental India Insurance into a single entity and list it on the exchanges.

The finance ministry is likely to look into the merger and listing proposal and take a decision in FY25, said the person mentioned above.

A finance ministry spokesperson didn’t respond to an emailed query.

India’s general insurance market comprises 27 companies, including the four major PSU entities mentioned above, 23 private players and six stand-alone health insurers.

Mint had in January 2023 reported that the public sector insurance firms had appointed EY to suggest restructuring of their operations in order to bring in profit and employee development through performance and capability management.

“Mergers of state-backed general insurance companies can be a better option (than divestment),” said N.R. Bhanumurthy, vice chancellor, Dr B. R. Ambedkar School of Economics University, Bengaluru.

“These companies have to revise their business models to be able to sustain themselves. Support from the government, in the form of recapitalization and providing a long-term plan, will go a long way,” he added.