Down 62% since the IPO, Star Health faces a regulatory test

Star Health Insurance, India's largest stand-alone health insurance company, has been under the regulator's radar for alleged violations in claim settlement. However, the insurer said the regulator's review was a routine process.

According to the insurance statistics handbook of the Insurance Regulatory and Development Authority of India (Irdai), Star Health and Allied Insurance Co. Ltd's claim ratio stood at 66.4% in 2023-24, meaning it paid out ₹66.5 towards claim settlements for every ₹100 premium collected. This is higher than that of other stand-alone health insurers, with a claim ratio of 63.6%, but lower than that of general and health insurers, whose ratio stood at 82.5%.

Despite its dominant position, Star Health stock has struggled since its listing in December 2021, falling 62% to ₹353. So, what’s impacting its performance? Let's break it down.

Market leader

Star is the second-largest company in the overall health market, with a market share of 13.9% (in 2023-24), behind New India Insurance (16.9%). While it ranks second in the overall health insurance segment, it leads among stand-alone players with a 59% market share, followed by Care Health.

Star's dominance stems from its stronghold in the retail health segment, where it holds a 33% share, over three times that of the second-largest Care Health (9.42%). With 760,000 agents—the second-largest network after Life Insurance Corporation of India—Star relies on its extensive distribution network, generating 82% of gross written premiums from individual agents.

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Star's strength in the retail segment can be gauged from its revenue mix, with 91.5% of revenue coming from retail, 7% from group insurance and the rest from personal accident (PA) and foreign and domestic medical policies.

Premium collection growth

With its dominant position, Star has been a key beneficiary of India's increasing health insurance penetration. This can be seen from the strong growth in gross written premium (GWP), which grew at a compound annual growth rate (CAGR) of 22% from ₹6,865 crore in 2019-20 to ₹15,255 crore in 2023-24, a year-on-year increase of 18%.

In 9MFY25, GWP stands at 11,643 crores, compared to ₹10,286 crores in 9MFY24. Retail health insurance remains its primary premium driver, contributing 92% of GWP, while group health accounts for 7.6%. However, while premium growth has been strong, rising claims have posed a challenge.

Claims outpace premium gains

As premiums have increased, Star's claim ratio also increased, meaning it paid out a higher portion of premiums in the form of claims. The company's claim ratio was 65.9% in 2019-20, but it spiked to 94.4% and 87% in the next two years due to the pandemic.

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The ratio fell to 65% in 2022-23 as pandemic-driven claims subsided. However, it rebounded to 66.4% in 2023-24 and 70.7% in 9MFY25, indicating a rising claim payout. Star paid ₹70.7 in the claim settlement for every ₹100 earned as a premium.

Industry insiders attribute this to increased hospitalisations post-pandemic. However, even in that case, Star's claim ratio appears to be higher than that of its competitors, such as Niva Bupa (59.4%) and Care Health (60%).

Higher payouts affect underwriting profits and margins, often forcing companies to raise premium rates. Evidently, Star has repeatedly raised premium rates in recent years to meet rising claims, but this alone may not be enough to maintain profitability.

Concerns: Combined ratio crosses 100%

On a positive note, Star Health's expense ratio—which measures expenses as a percentage of earned premiums—has remained relatively stable, rising from 27.5% in 2019-20 to 30.3% in 2023-24 and 31.2% in 9MFY25. But despite controlled expenses, rising claims have pushed its combined ratio—a key profitability metric —higher.

The combined ratio (claim ratio + expense ratio) was 93.4% in 2019-20 but surged to 117.9% in 2021-22. It later declined to 95.3% in 2022-23 but rebounded to 96.7% in 2023-24 and 101.9% in 9MFY25. A ratio above 100% indicates that the company is paying out more in claims and expenses than it earns in premiums, leading to underwriting losses.

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Underwriting struggles

With a record-high combined ratio of 117.9% in 2021-22, Star reported an underwriting loss of ₹2,061 crore. As claims normalized, it rebounded to a profit of ₹205 crore in 2022-23, but as the ratio rose again, the profit fell to ₹90 crore in 2023-24. By Q9FY25, Star reported an underwriting loss of ₹104 crore, reversing from a ₹180 crore profit in the previous year.

Investment income cushion

Like most insurers, Star Health offsets underwriting volatility with investment income. Star’s investment income has grown strongly at 39% CAGR, rising from ₹293 crore in 2019-20 to ₹1,084 in 2023-24. However, while this helps cushion underwriting losses, profitability remains exposed to claim fluctuations.

Profit decline

The company posted a net loss of ₹1,041 crore in 2021-22 due to higher underwriting losses. However, it rebounded to a profit of ₹619 crore the next year and grew 36% to ₹845 crore in 2023-24. But again, in 9MFY25, the company profit dipped 8% on-year to ₹645 crore as the combined ratio crossed 100%. This constant volatility in its profitability has also been a pain point.

Composite licence: A key overhang

The composite licence remains a key overhang on Star's business. The licence will allow companies to offer both non-life and life insurance products, including health and motor insurance, leading to increased competition from larger insurers. This could weaken the dominance of a standalone health insurance company like Star Health.

The timeline for implementation is not yet confirmed. However, investors appear cautious and prefer to wait until clarity emerges rather than board a ship that may derail due to regulatory changes.

Valuation at a discount

Star Health's valuation has declined from 6.4 times book value at listing to three times currently. The current valuation is not only lower than the three-year median multiple of 5.6 but also lower than that of Niva Bupa (6.9). While its 14.4% return on equity is higher than Niva's (5.7%), the discount reflects street concerns over underwriting performance, regulatory overhang, and volatile profit.

The road ahead

Star Health is a dominant player in India’s health insurance sector, benefiting from rising insurance penetration with an army of over 700,000 agents. However, underwriting losses, rising claim payouts, and regulatory concerns have weighed on its performance. Although its investment income has cushioned the impact, improvements in claims management and stability in profitability will be key to turning its situation around.

For more such analyses, read Profit Pulse.

The copy has been updated to include Star Health's statement that Irdai's review was a routine process.

About the Author: Madhvendra has been a passionate follower of the equity market for over seven years and a seasoned financial content writer. He loves reading and sharing his opinions about publicly listed Indian companies and macroeconomic trends. 

Disclosure: The writer does not hold the stocks discussed in this article.

The purpose of this article is only to share interesting charts, data points, and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.