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CASE GAME The Case of The Insurance Merger Contd. Merging To Succeed
The issue at hand is not just of size. Nor of the extent to which size can influence the transformation of IGIL. It is about the company's vision and its corporate objectives. This is where the confusion begins. And it is compounded by the fact that IGIL has different stakeholders with varied objectives. Take the first stakeholder-the State. It does not articulate its objectives. Whenever it does, it makes conflicting noises about privatisation and the protection of jobs. It has little say in day-to-day management. It is represented by board-members, both at IGIL and its subsidiaries, but these members do not know the mind of either the shareholder or the regulator. The second stakeholder is the management of the companies. This group, it may seem, has not provided effective leadership. Suhas Nair has a personal stake. He is fixated with leaving on a high note. His ability to lead the subsidiaries and make correct decisions is seriously impaired. Saran has a point when he is talking about the reduction in overhead costs. But that means fewer number of senior management positions and a cut in the associated perquisites. The next stakeholder is the employee group. It is certain to be represented by different unions. At the grassroot level, these groups may support consolidation. Or they may not. Finally, we have the most neglected, yet the most critical stakeholder, the consumer. Does he have any say in the matter? Bharat Kumar has some views on this. These views are, however, based on a very limited knowledge of the consumer and his needs. IGIL may have gathered some perceptions of the consumer based on the feedback provided by some consumer organisations. But these organisations can only articulate what is 'wrong' with the service provided. They provide no clue to the actual needs of consumer. It is important for both Suhas Nair and Bharat Kumar to recognise that the organisations that produce (producers) and those that distribute (distributors) financial service products need different structures. Globally, the producers are in consolidation-mode. Their strength flows from the size-and scale advantages presented by a merged balance-sheet. Distributors, in contrast, are increasingly becoming independent organisations. They are also focused on consumer, product and geographic segmentations.
One cannot ignore the political overtones in a decision pertaining to a typical state-owned enterprise. But, in my view, it is advantageous for the subsidiaries to be separate both from IGIL and from one another. The units could be privatised individually at a later date depending on the right time, opportunity, and valuation. The reason behind restructuring IGIL, as mentioned by Nair, is to prepare the organisation to become competitive. It is in this context that one must examine whether a large, state-owned organisation can be agile while responding to market demands, especially in the face of competition from new entrants. Unlike the life insurance business, the relationship between a customer and the general insurer comes up for renewal every year. The customer is driven completely by a commercial motive and can switch loyalties at any time. State-owned organisations in general suffer from the problem of lack of customer friendliness in service businesses. Inevitably, the larger the organisation, the greater the number of complaints. In this context, it is important for an insurer to become market-oriented and infotech-enabled. These priorities could take the backseat if the management has to spend time on human resource adjustments in a merged context. When business-focus is the compelling need of the hour and the customer should be central to every managerial initiative, there is no point in wasting time managing turf wars. A new player may take five years to hit a premium income of Rs 800 crore to become commercially viable, whereas each unit of IGIL has an income of more than Rs 2,000 crore. It is on this unique strength that Nair should build the new organisation. Competition between various units is welcome. It not only facilitates the growth of individual units, but also generates pockets of specialisation. That, in turn, could lead to an appropriate business focus for each unit. IGIL could then be converted from a holding company to a national re-insurer. And this, in turn, will provide the necessary focus for the main company. A major issue that Nair and his team will have to address is the creation of a pool of business leaders for the future who can not only take on new responsibilities, but also measure up to emerging challenges. Delinking the subsidiaries addresses this vital issue better than a merger.
A Merger makes sense: the inherent advantages outweigh the disadvantages. But a merger is unlikely to happen because there is a strong case for setting up a National Reinsurer in India. In fact, even the Insurance Act supports the provision for a National Reinsurer (NR). The merger of four subsidiaries with IGIL can be thought of only when a 'new' NR is set up instead of converting IGIL itself into one. The single-largest problem in a merger is integration. When the general insurance industry was nationalised by the government in 1972, there were over 100 private general insurers in India. Their size in terms of premium and staff varied. The ownership pattern was also different-government, private, foreign, and co-operative. Each had its own unique culture. The pay scales varied. But the merger was successfully achieved. In contrast, we are talking of only four subsidiaries here. They all have similar cultures. True, a merger will still be a time-consuming activity for senior managers. But it can be easily managed by setting up an integration cell. All issues relating to placement of top personnel, duplication of cadres, and finding a perfect fit between a position and the person can be sorted out satisfactorily. Mergers are gaining momentum because, notwithstanding technological advancement, size and geographical reach still matter. In fact, size, geographical distribution, and technology are equally important success factors in the insurance business. True, a large organisation will have some inherent weaknesses, like delays in decision-making and operational inefficiencies. But, surely, the answer lies in delegation, decentralisation, and empowerment. There are several instances of large financial services companies being nimble, agile, and close to the customer. Significantly, the Indian banking sector has also been witnessing a lot of consolidation activity. But the merger of four insurance companies will not be as difficult as that of state-owned banks. Given the new competitive scenario in Indian insurance, it is important for the management of IGIL to give adequate attention to issues like solvency norms, retention, strengthening assets, technology, expansion of operations, pre-empting unhealthy competition among the subsidiaries, pooling the customer base, and reducing overhead costs. Clearly, a single, large, and focused insurance company can and will ensure this. |
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