TOKYO - JAPAN'S Mitsui Sumitomo Insurance Group Holdings Inc, Aioi Insurance Co and Nissay Dowa General Insurance Co are in talks to merge, a company source said, a move that would create Japan's largest non-life insurer.

The three aim to reach a basic agreement on the deal by March 2009, the source said on Monday.

Japanese media, including the Nikkei business daily and public broadcaster NHK, said the three are in talks to merge as early as next autumn.

Automobile and housing sales have been sluggish amid the economic downturn, hitting demand for car and fire insurance, prompting the non-life insurers to seek ways to boost competitiveness.

The merger of Japan's No.2, No.4 and No.6 non-life insurers would create the biggest player in the domestic market with net premium revenue of about 2.7 trillion yen (S$43.3 billion). That would surpass the current top non-life insurer Tokio Marine Holdings Inc by 22 per cent.

Net premium revenue is roughly equivalent to income from policyholders minus the amount the company itself pays for reinsurance.

The three companies said in separate statements that they had nothing to announce at this time. -- THOMSON REUTERS