Three Japanese non-life insurance companies specialising in car and housing insurance, and with combined revenues of $30.2 billion, are contemplating a merger to cope with falling demand as recession sets in on the Japanese economy.

According to media reports, Mitsui Sumitomo Insurance Group Holdings, Aioi Insurance Co. and Nissay Dowa General Insurance Co, all non-life insurance companies are in the final stages of talks for a three-way merger could take place as early as March next year.

A merger of the country's second, fourth and sixth largest non-life insurers would enable them to boost profits, cut cost and expand to other countries, especially in Asia and make the new company, the leader in non-life insurance in Japan, ahead of industry leader Tokio Marine.

The non-life insurance sector is under strain from its core product sales related to the auto-insurance, which has shrunk due to falling sales in the automobile industry, to its lowest since 1974.

The industry has suffered also due to an ageing population and a birth rate which is declining, as also the surging yen has battered the worth of insurers' foreign-currency denominated assets resulting in a decline in profitability.

Deregulation in the late 1990s helped Japan's non-life insurance sector to consolidate and MSIG, Aioi and Nissay Dowa were created through mergers during that time.

Aioi Insurance was created after a merger of Dai-Tokyo Fire and Marine Insurance Co. and Chiyoda Fire and Marine Insurance, while Nissay Dowa General Insurance was established after the merger between Dowa Fire and Marine Insurance and Nissay General Insurance in April 2001.

Mitsui Sumitomo Insurance Group Holdings was established after the merger of Mitsui Marine and Fire Insurance and Sumitomo Marine and Fire Insurance.

Analysts feel that the merger will lead to another restructuring of the insurance industry as well as the financial industry including banks, securities companies and life insurers.

Mitsui Sumitomo is strong with individual clients and Aioi strength derives from customers of Toyota car dealers and Nissay Dowa has tie ups with Nippon Life.

Nippon Life Insurance has a 35-per cent stake in Nissay Dowa and Toyota Motor owns one-third of Aioi, which had a net loss on account of subprime mortgages in March ending business year.

Off-hours trading of all the three insurers were temporarily suspended by the stock exchange authorities after share prices shot up on the merger news.