Star Health and Allied Insurance: Navigating Challenges in a Competitive Landscape

Star Health and Allied Insurance Co. Ltd has established itself as a significant player in India’s health insurance market. According to the Insurance Regulatory and Development Authority of India (IRDAI), the company reported a claim ratio of 66.4% for the fiscal year 2023-24. This means that for every ₹100 collected in premiums, Star Health paid out ₹66.5 in claims. While this figure surpasses the average claim ratio of 63.6% for other stand-alone health insurers, it falls short of the 82.5% ratio observed among general and health insurers. Despite its strong market position, Star Health’s stock has faced considerable challenges since its listing in December 2021, plummeting by 62% to ₹353. This article delves into the factors influencing Star Health’s performance and the broader implications for the health insurance sector.

Market Leadership and Distribution Strength

Star Health holds the title of the second-largest health insurance provider in India, boasting a market share of 13.9% for the fiscal year 2023-24, trailing only New India Insurance, which commands 16.9%. Among stand-alone health insurers, Star Health leads with a commanding 59% market share, significantly outpacing its closest competitor, Care Health.

The company’s dominance is largely attributed to its robust presence in the retail health segment, where it captures a remarkable 33% market share—over three times that of Care Health’s 9.42%. With a network of 760,000 agents, Star Health has the second-largest distribution network in the country, following the Life Insurance Corporation of India. This extensive network is crucial, as it generates 82% of the company’s gross written premiums (GWP) from individual agents. The revenue mix further underscores Star’s retail strength, with 91.5% of its revenue derived from retail health insurance, 7% from group insurance, and the remainder from personal accident and medical policies.

Premium Collection Growth Amid Rising Claims

Star Health has been a key beneficiary of the increasing penetration of health insurance in India. The company’s GWP has experienced impressive growth, achieving a compound annual growth rate (CAGR) of 22%, rising from ₹6,865 crore in 2019-20 to ₹15,255 crore in 2023-24, with an 18% year-on-year increase. In the first nine months of FY25, GWP reached ₹11,643 crore, up from ₹10,286 crore in the same period the previous year. Retail health insurance remains the primary driver of this growth, contributing 92% of GWP, while group health accounts for 7.6%. However, the surge in premium collections has been accompanied by a troubling rise in claims.

Claims Outpacing Premium Gains

As premiums have risen, so too has Star Health’s claim ratio, indicating that a larger portion of premiums is being paid out in claims. The claim ratio was 65.9% in 2019-20 but spiked to 94.4% and 87% in the subsequent two years due to pandemic-related claims. Although the ratio fell to 65% in 2022-23 as pandemic-driven claims subsided, it rebounded to 66.4% in 2023-24 and reached 70.7% in the first nine months of FY25. This trend suggests an increasing claim payout, with Star paying ₹70.7 in claims for every ₹100 earned in premiums. Industry insiders attribute this rise to increased hospitalizations post-pandemic, but Star’s claim ratio remains higher than competitors like Niva Bupa (59.4%) and Care Health (60%).

The higher payouts have adversely affected underwriting profits and margins, often necessitating premium rate increases. Star has raised its premium rates multiple times in recent years to address rising claims, but this strategy alone may not suffice to maintain profitability.

Concerns: Combined Ratio Exceeds 100%

On a positive note, Star Health’s expense ratio—measuring expenses as a percentage of earned premiums—has remained relatively stable, increasing from 27.5% in 2019-20 to 30.3% in 2023-24 and 31.2% in the first nine months of FY25. However, rising claims have pushed the combined ratio—a critical profitability metric—higher. The combined ratio (claim ratio + expense ratio) was 93.4% in 2019-20 but surged to 117.9% in 2021-22. Although it declined to 95.3% in 2022-23, it rebounded to 96.7% in 2023-24 and crossed the 100% mark to reach 101.9% in the first nine months of FY25. A combined ratio above 100% indicates that the company is paying out more in claims and expenses than it earns in premiums, leading to underwriting losses.

Underwriting Struggles and Investment Income

Star Health’s underwriting challenges are evident in its financial performance. Following a record-high combined ratio of 117.9% in 2021-22, the company reported an underwriting loss of ₹2,061 crore. As claims normalized, it rebounded to a profit of ₹205 crore in 2022-23, but the profit fell to ₹90 crore in 2023-24 as the combined ratio rose again. By the first nine months of FY25, Star reported an underwriting loss of ₹104 crore, reversing from a profit of ₹180 crore in the previous year.

To mitigate underwriting volatility, Star Health relies on investment income, which has grown significantly at a CAGR of 39%, increasing from ₹293 crore in 2019-20 to ₹1,084 crore in 2023-24. While this investment income helps cushion underwriting losses, the company’s profitability remains vulnerable to fluctuations in claims.

Profit Decline and Regulatory Concerns

Star Health’s financial trajectory has been marked by volatility. The company reported a net loss of ₹1,041 crore in 2021-22 due to heightened underwriting losses. However, it rebounded to a profit of ₹619 crore the following year, which grew by 36% to ₹845 crore in 2023-24. Yet, in the first nine months of FY25, profit dipped by 8% year-on-year to ₹645 crore as the combined ratio exceeded 100%. This persistent volatility in profitability has raised concerns among investors.

Additionally, the impending introduction of a composite license poses a significant overhang on Star’s business. This license would enable companies to offer both non-life and life insurance products, intensifying competition from larger insurers and potentially undermining the position of a standalone health insurance provider like Star Health. The timeline for implementation remains uncertain, leading investors to adopt a cautious stance as they await clarity on regulatory changes.

Valuation at a Discount

Star Health’s valuation has seen a significant decline since its listing, dropping from 6.4 times book value to three times currently. This valuation is not only lower than the three-year median multiple of 5.6 but also trails behind Niva Bupa’s valuation of 6.9. While Star’s return on equity stands at 14.4%, surpassing Niva’s 5.7%, the discount reflects market concerns regarding underwriting performance, regulatory uncertainties, and volatile profitability.

The Road Ahead

Star Health remains a dominant player in India’s health insurance sector, benefiting from rising insurance penetration and a vast network of agents. However, the company faces significant challenges, including underwriting losses, escalating claim payouts, and regulatory concerns that could impact its market position. While investment income has provided some cushion against these challenges, improvements in claims management and stability in profitability will be crucial for Star Health to navigate the turbulent waters ahead.

In conclusion, Star Health’s journey in the health insurance landscape is a testament to both its strengths and vulnerabilities. As the company strives to maintain its market leadership, stakeholders will be closely monitoring its strategies to enhance profitability and adapt to an evolving regulatory environment.