Size, for an insurance operation, is far more crucial than for any other financial sector business. Compared to the deep-pocketed foreign players operating in the country, the domestic government-owned companies are still pygmies.

"The set-up adopted by government at the time of nationalisation of general insurance business was that of a holding company and four subsidiaries. However, the expectation that the subsidiary companies would provide effective competition to each other has been largely belied ..." - Malhotra Committee on insurance sector reforms.

This statement describes succinctly the state of competition between the four government owned non-life insurers - National Insurance Company, New India Assurance Company, United India Insurance Company and Oriental Insurance Company. During FY2004 all four companies earned a gross premium income of Rs.14,284 crore.

However, a look at their product portfolio, rates and their organisational structure shows little difference between them.

According to the All India Insurance Employees Association (AIIEA), the four public sector undertakings have lost premium income of around Rs.6,000 crore last fiscal because of competition among themselves. Interestingly, not only do the government-owned insurers compete among themselves and with eight private players, different offices of the same government company compete with one another too.

Now, as the pressures for mergers of government organisations become stronger, as we can see in the banking and the telecom sectors, the government, according to reports, seems to be looking at options to unify the four non-life insurers into a single entity.

Arguing in favour of a merger, G V Rao, industry analyst and former chairman and managing director, Oriental Insurance Company Limited, says, "Merger of the four companies is necessary for two reasons. The very purpose of creating four units in 1973 to offer consumers a choice in a monopolistic environment now no longer holds good, as consumers now have a greater number of insurance companies to chose from. The government must conserve its resources and not fritter them away by encouraging purposeless competition among its units." If there is a delay in merging the four companies, they will slip rapidly because of the mutual destruction of each other's efforts, Rao cautions.

Even the employee unions are in favour of a merger. Citing the national common minimum programme of the United Progressive Alliance government, which promises strengthening of the public sector insurance companies, the AIIEA argues that the merger would help in strengthening the government insurance companies to better meet the challenges ahead.

According to the union, not only are these companies losing profitable business, they also bear higher costs on their transactions, thanks to brokers. And, once de-tariffing (freeing rate controls) takes place, the public sector companies are likely to lose more in any rate war that ensues.

Others, too, have advocated merger. Three years ago, a Committee on Public Undertakings report stated, "… with the entry of private and foreign companies into the Indian insurance market, the committee feels that there is no need to have four different subsidiaries to provide competition, as this would be readily forthcoming from the private sector. The need of the hour is to have one merged entity which would greatly reduce management expenses and also simultaneously enhance per capita premium productivity and reserve position of the merged entity."

In 2000, PriceWaterhouseCoopers recommended consolidation, stating that the combined financial strength of the companies would lead to a balance sheet that allows:

• Diversification into other financial services and strengthening of international operations.
  
• Investment in technology and distribution infrastructure to grow the existing business.
  
• Business expansion, free of concerns on solvency norms, and maximum retention of business in the country.