Nepal’s insurance sector has experienced substantial consolidation in recent years, prompted by the increased paid-up capital requirements for insurance companies. The Nepal Insurance Authority (NIA) – the regulator of the insurance sector – has raised the paid-up capital of insurance companies tenfold since 2017 in two phases, leading insurance companies to pursue mergers to meet the regulatory capital requirement.
This insurance sector consolidation has not only strengthened the capacity of insurance companies but also enhanced the efficiency of insurers. Conversely, the numerous mergers in the insurance sector have resulted in a reduction of lucrative job opportunities in the market, particularly in leadership roles. However, concurrently, with the goal of diversity and inclusion in services and expanding insurance coverage to the uninsured, the NIA has issued licences to several micro life and micro non-life insurers. Alongside the mega-mergers, the insurance sector has been implementing various human resource management strategies to retain talent.
Although mergers in the insurance sector are stabilising, various unresolved and ongoing issues persist, requiring institutions to proceed with care and prudence in assimilating staff from diverse work cultures and environments, and, crucially, to ensure their job satisfaction and maintain their motivation to perform.
Mergers and Acquisitions Landscape
The contribution of the insurance sector in job creation is significant. Insurance companies including reinsurance companies and micro insurance companies are believed to have employed around 12,000 employees in the country. However, people management after various mega mergers in the insurance sector has become a critically sensitive issue. The precarious situation in the Nepali economy over the past few years has diminished employee confidence. This is due to a scarcity of job market opportunities and the fear of job loss if employees voice grievances to HR or management. Consequently, the accumulated dissatisfaction has resulted in underperformance or non-performance, which ultimately impacts the company’s growth.
Mergers and acquisitions (M&A) are a relatively new concept in the insurance sector though this practice has been successful to a large extent among banks and financial institutions (BFIs). BFIs also had resorted to M&A as an appropriate and effective alternative following the paid-up capital increment.
Studies have shown that mergers and acquisitions are a critical tool to ensure sound and efficient performance of the service industries, mainly, BFIs and insurance firms. “Also, a merger between a weak and a strong institution will strengthen the overall health of the institution and rescue the weaker institution without failure,” said Laxmi Prapanna Niroula, former Executive Director of Nepal Rastra Bank, while sharing his reflections of mergers among BFIs and their impact.
“The impact of insurance mergers has yet to be studied in depth, given the brief period of their post-merger joint operations. However, the increased capital base strengthens the institutions’ capacity to expand competitive services,” stated Prof. Dr. Fatta Bahadur KC, former Chairperson of the Nepal Insurance Authority (formerly the Insurance Board). “I believe it will better serve policyholders’ interests and promoters’ desires, as insurance firms will be able to minimise operational costs and enhance competitiveness and profitability,” he added.
Mergers and acquisitions in Nepal are driven by the regulator’s choice and interest in effective regulation and supervision. Regulatory capital increases have been used as an effective tool to voluntarily encourage mergers between insurance firms, allowing them to freely find and negotiate with potential partners. Some deals between insurance firms were terminated during pre-merger negotiations. Alongside the paid-up capital increase, the regulator, the Nepal Insurance Authority, has introduced risk-based capital, which requires companies to increase capital based on their risk exposures, according to Madan Dahal, former Chairperson of NIA, who expedited the implementation of risk-based capital in insurance companies. However, mergers may yield unexpected results if they fail to meet the initial expectations of staff and promoters.
Human resources management after merger
Several studies have illustrated that mergers and acquisitions often involve a high degree of uncertainty and can be challenging for the employees. In Nepal, pre-merger consultations with employees were seldom conducted, with decisions largely confined to the board and senior management team. Consequently, mergers can escalate employee anxiety, leading to counterproductive behaviours. Employee career growth may be negatively impacted, their expectations may remain unmet, and job insecurity may prevail among staff. These behaviours pose significant obstacles to a successful merger process. Without a deliberate and vigilant effort to ensure the ‘right person in the right place,’ primarily the function of human resource managers, these employee sentiments can erode their organisational commitment, trust in the organisation, job satisfaction, and overall performance.
Staff turnover in the insurance sector has been substantial following mergers. Employee management has not received sufficient attention post-merger. According to employees, “Due to the lack of implementation of organisational policies to manage human resources, even talented individuals from comparatively weaker institutions have not been assigned appropriate roles. Employees are divided by the perceived superiority of dominant institutions after the joint operations of merged insurance companies.”
Maintaining high employee morale has been emphasised as a crucial responsibility for HR professionals working in insurance companies. Moreover, leadership must possess the ability to address employee ego and attitudes through consultative processes, horizontal work discussions, and the integration of employees via retreats, training and development, fieldwork and other collaborative endeavours.
Experts emphasise the necessity of staff orientation regarding organisational policies prior to a merger. They also highlight that a scientific assessment of staff performance capabilities, coupled with periodic independent appraisals and incentive alignment based on these appraisals, will produce positive output results and favourable implications for organisational growth following the merger.
HR strategies after merger
To address potential turnover and turnover intentions, various strategies have been implemented following the merger of insurance companies. The policies adopted to recognise employees in the post-merger phase are attributed to departmental leadership in conjunction with the Human Resource Department. Conversely, mid-career staff turnover is elevated, primarily due to low compensation and limited exposure to back-office roles. Notably, the trend of migration has significantly affected professional youth, and the insurance sector has not been spared.
Despite numerous challenges, insurance companies are reportedly recognising their employees, conducting periodic independent evaluations, and providing rewards, learning, and development opportunities in the post-merger phase. Overstaffing has been addressed through voluntary retirement schemes, colloquially referred to as ‘golden handshakes.’
A high-ranking staff member from Himalayan Everest Insurance, speaking anonymously, shared that recognition has not only aided in employee retention but has also contributed to achieving organisational goals. Insurance firms have formulated their HR strategies to manage HR issues efficiently by addressing employee identity (dignity), ego, and attitude, work culture, both rigid and soft assimilation factors, employee behaviour, job satisfaction, organisational support, workload, and unbiased evaluation, among other considerations.
Further, incentives (both monetary and non-monetary) and rewards are linked to performance. Verbal recognition, leadership consultation with junior staff, advancement opportunities, flexible working hours, strong office communication systems, and effective grievance handling processes are all factors considered by the majority of insurance companies, both those that have undergone mergers and those that have not.
Insurance companies are not solely focused on efficiency, performance and output; they are equally aware of their image and reputation. They are actively striving to minimise staff turnover. Highlighting the adverse consequences of high turnover rates, a recently published research report titled ‘Mergers and Acquisitions of the Financial Institutions: Factors Affecting the Employee Turnover Intention’ by Rojan Baniya and Sujan Adhikari emphasises that high turnover typically results in increased direct and indirect costs for the organisation, encompassing recruitment, training, and the socialisation of new staff.
“Thus, ideally, the turnover rate in an organisation should be minimal because it facilitates the fostering of productivity among employees and maintains a stable corporate image and goodwill,” the report stated.
Prospects and challenges for insurance industry ahead
The insurance sector has witnessed significant growth over time. However, with an insurance penetration rate of only 44%, immense untapped potential remains. Regulatory advancements, particularly the transformation of the Insurance Board into the Nepal Insurance Authority, have contributed to this growth. The geographical reach of insurance companies has expanded, leading to increased tax contributions to the government. Moreover, life insurance companies have demonstrated a remarkable capacity to mobilise long-term funds, reaching nearly Rs. 700 billion. However, a dearth of suitable investment instruments hinders the optimal utilisation of these funds. The government could address this by issuing development bonds to channel these funds towards infrastructure development and enhance the productive capacity of the economy.
Conversely, a significant portion of the population remains underserved by insurance. To address this, the government should implement policies aimed at increasing accessibility and awareness among the underinsured population. This may involve providing income tax exemptions to encourage insurance purchases and offering grants to economically disadvantaged individuals to facilitate their entry into the insurance net.
The competitive landscape within the insurance industry presents challenges such as misselling and an increased lapse ratio due to inadequate consumer information, according to Shiva Nath Pandey, Chief Executive Officer of Sanima Reliance Life Insurance. “The regulator’s recent introduction of microinsurance initiatives is a positive step towards providing coverage at the grassroots level. However, it is crucial to ensure that these microinsurance programmes are operating effectively to achieve their intended objectives,” he mentioned.
It is underlined that another critical challenge facing the sector is a shortage of skilled talent. Within the insurance sector, employment opportunities primarily fall into two categories: marketing/front-office roles and back-office/support roles, as per Pandey, “While marketing roles present unique challenges and opportunities, they generally offer greater potential for career growth for high-performing individuals compared to back-office positions.”
Mainly, the low pay at the lower and medium level has been identified as the major hindrance in employee retention in the insurance sector.
Prof. Dr. Fatta Bahadur KC
Former Chairperson, Nepal Insurance Authority (erstwhile, Insurance Board)
The rationale behind insurance company mergers is clear, yet its success hinges on the enhanced competitive strength of the resultant service providers. Post-consolidation, improvements in efficiency, customer service, and financial performance are imperative, fulfilling the regulatory objectives of the merger.
Human Resources (HR) is pivotal in achieving these anticipated outcomes and impacts. HR modifications must stem from organisational imperatives. In the past, excessive competition and high staff turnover were common due to market saturation, facilitating swift career progression. However, a deficit in workforce knowledge, skills, and capacity persists, necessitating targeted training and development.
Although staff turnover has decreased following consolidation, it’s vital to offer all employees avenues for capacity building and guarantee equitable opportunities for optimal performance. Ultimately, the insurance sector’s sustainability is paramount. I am confident that the industry will advance through adept professional management, skilled human resources and robust governance.
Prakash Bikram Khatri
CEO, Surya Jyoti Life Insurance
Merger is an exceedingly intricate transaction, and while all facets, including legal, technology integration, portfolio and investment consolidation, and standardisation of processes and policies, are critically important, HR integration is the most delicate and can dictate the merger’s trajectory and the degree of synergy achieved. Given the surplus headcount generated, it is crucial that management undertakes judicious measures to ensure precise evaluation of staffing needs and implements necessary actions to attain optimal resource levels.
Considering the inherent complexities, the residual impact of the merger will persist within the company, which, if mismanaged, can directly affect performance. Therefore, proactive engagement at all levels is essential to cultivate team cohesion as swiftly as possible. It is also vital to foster an open and transparent atmosphere where team members can articulate their concerns in a structured manner. The team’s sense of affiliation should solely be with the merged entity, and they should relinquish their previous affiliations, embracing clarity, confidence and enthusiasm in the new operational framework established through the merger.
Bharat Sunam
Chief Manager, Human Resource and Branding, Siddhartha Premier Insurance
During the merger of two prominent non-life insurance companies in Nepal, beyond the financial consolidation, we prioritised the human resources integration, recognising that organisational merger success fundamentally relies on the unification of its workforce. Throughout the merger and subsequent phases, we concentrated on three core strategies: Communication, Training & Orientation, and Socialisation.
This entailed sustaining transparent communication with our employees to mitigate anxiety. We ensured they received timely updates. Subsequently, we delivered training and orientation on new procedures and systems, as well as behavioural adjustments, to facilitate their adaptation and foster a positive reception to change. Furthermore, we equally emphasised socialisation. Prior to the merger, we implemented various socialisation initiatives, including overnight stays, to promote camaraderie in an informal environment.
Our supplementary HR strategies encompassed cultural integration, the development of new HR policies and practices, employee engagement programmes, the establishment of a grievance handling committee, the digitisation of HR services through technology, the design of talent retention programmes, and the alignment of rewards with organisational imperatives. Moreover, we established HR practices grounded in the 3 P’s philosophy: People, Process, and Performance. This signifies our commitment to being people-centric, process-driven, and performance-oriented.
