The Insurance Board (IB) is pushing for mergers between
insurance companies as the deadline for the companies to meet the paid up
capital requirement is less than six months. Mergers between insurance
companies have become essential because the deadline to increase their paid up
capital is fast approaching. By end of current fiscal year, regulation requires
non-life insurance companies to increase their paid up capital to Rs 250
million and life insurance companies are required to increase it to Rs 500
million. None of the existing insurance companies ¿ both life and non-life ¿
are currently able to fulfill the paid up capital requirement.
"Mergers among insurance companies are not only necessary
for increasing paid up capital but the market requires consolidation as well,"
said chairman of Insurance Board Prof Dr Fatta Bahadur KC. At present there are
25 insurance companies ¿ 16 non-life and nine life ¿but Rastriya Beema Sansthan
is allowed to provide both life and non-life services. Yet, the penetration of
the insurance companies is limited. Less than five per cent of the total
population is believed to own any kind of insurance policy.
"Mergers are not the only option for companies to increase
their paid up capital but it is the most prudent one," pointed out Dr KC.
Companies can increase their paid up capital by issuing bonus shares and rights
shares to existing shareholders. IB has not allowed the companies to issue cash
dividend till they fulfill the paid up capital requirement.
"If the companies are not able to expand their business in
proportion to increased capital, the whole sector will suffer, but mergers will
minimise their operation cost, reduce unhealthy competition, and increase
market share among others," he said.
A year back, Prudential Insurance Company, United Insurance
Company and Shikhar Insurance Company had opted for a merger but it was aborted
midway. Likewise, one and a half years back, merger process of Shikhar
Insurance, Premier Insurance and Sagarmatha Insurance also did not take off as
they failed to agree on major issues. IB is planning to prepare merger
guidelines to encourage insurance firms to merge.