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.