For Star Health, regulatory change a positive; focus remains on profitability

The regulatory changes related to limiting expenses of management (EOM) appear positive for Star Health. The Insurance Regulatory and Development Authority of India has recently announced a limit on the overall EOM of general and health insurers. EOM is capped at 30% of gross premium underwritten for general insurers (GI) and 35% for standalone health insurers (SAHI). 

Currently, insurance companies pay a certain percentage of the total premium as commission to intermediaries. The regulator has removed this cap now, providing flexibility to the insurers, but has kept an overall limit on EOM. This is to take effect from 1 April.

Motilal Oswal Financial Services analysts said, “The recently announced EOM regulation will have positive outcomes for Star Health as most of the competition is above the threshold of 35%/30% for SAHIs/GI players, while Star Health operates well below.” Currently, all SAHIs except Star Health have an EOM above 35%, they added in a report.

Thus, while the ability to pay higher commissions could be limited for other general or health insurance companies, Star Health is better off. For the nine-month ended December, Star Health’s combined ratio stood at 96.9%. A combined ratio of more than 100% indicates an insurance company is paying more than it is earning. For perspective: ICICI Lombard’s combined ratio is at 104.6%. “The removal of the commission limit also opens many new distribution avenues, especially the public sector bank channel, as a big opportunity, which can now add more partners as they can receive higher commission in a transparent manner,” said Emkay Global Financial Services report.

Hereon, analysts expect Star Health to continue its focus on specialised insurance product mix, price hikes, agents’ addition, improvement in bancassurance channel partnerships and expansion of network hospitals to aid profitability growth going ahead. This should aid the stock performance as well.

In the past year, the stock is down nearly 25%, owing mainly to a combination of expensive valuation and earnings volatility, point out analysts at Emkay. “Currently trade on FY25E price-to-earnings ratio of 23x, which looks appealing with growth and profitability expected to accelerate going ahead,” they said in a report.

Further, the company plans to implement IFRS accounting over the years, which could improve return ratios. Motilal Oswal’s analysts said that the change to IFRS accounting will result in increased return ratios as it allows expenses to get book over the term of the product. “RoEs can get a boost of 2-2.5%,” they said. RoE is short for return on equity.