Indian Health Insurance Sector Shows Promising Growth, Profitability Potential

The Indian health insurance sector has experienced steady trends in the fourth quarter of FY23, following a decline in the previous quarter. A recent report by Motilal Oswal Financial Services sheds light on the trajectory of claims and dynamics surrounding hospitals in the sector. The report highlights increased hospitalisations in the first quarter of FY24, with a decline in average stay and reduced ticket size. Furthermore, negotiations with insurance companies have shown higher price demands. These factors, along with improved pricing and business strategies, are expected to drive profitability in the medium term. 

Hospitalisations on the rise, average stay declines 

According to the report, hospitalisations have increased in the first quarter of FY24 compared to the previous quarter. This growth builds upon the steady trend observed in the fourth quarter of FY23, which saw a rise in elective surgeries and a decline in viral ailments. Despite the rise in hospitalisations, the average stay has declined due to a higher proportion of day-care surgeries. Consequently, overall hospital occupancy rates were lower, but the number of discharges increased. As a result, per customer billing declined during the quarter on a quarter-on-quarter basis. 

Continued presence of Covid-related consumables and tests 

Covid-related consumables and tests remain a part of insurance claims as hospitals prioritise the safety of their staff and patients. Although these additional costs impact insurance claims, they are expected to persist for the foreseeable future. Notably, cardiac and oncology cases continue to dominate the share in the number of claims and hospitalisations. 

Improved negotiations and agreed rates with network hospitals 

Hospitals engage in constant negotiations with insurance companies, with varying terms across different establishments. Over the past year, the report indicates that agreed rates with hospitals have increased by 15-20 per cent for public sector insurance companies. Private sector players and specialised standalone health insurers (SAHIs) have maintained the same discount rates, but they have implemented a revision of 10-12 per cent in base tariffs. Additionally, room rents have experienced a three to four per cent increase over the past year, although hospitals generally refrain from significant and frequent hikes in room rents. 

Key takeaways and growth prospects 

The report highlights that insurance claims account for approximately 42 per cent of hospital revenue, with 85 per cent of these claims processed through the cashless route. Among the insurers, Starheal, HDFC Ergo, ICICI Lombard, and Bagic conduct the majority of their business with hospitals. Other SAHIs have seen fewer claims as their customer base is relatively new. 

The report predicts a sequential increase in claims in the second quarter of FY24, primarily driven by viral and monsoon-related ailments. Insurance companies aim to encourage customers to use their network hospitals to enhance the quality of treatment and improve their own claims ratios. However, the final choice of hospital and doctor still lies with the customers. 

Promising growth and profitability for Starheal and ICICI Lombard 

To enhance its business mix, Starheal has been focusing on retail health and specialised products. The company has also increased the sum assured per customer and improved its tech capabilities to enhance fraud detection. These strategic initiatives are expected to result in improved claims and combined ratios. Based on these prospects, Motilal Oswal reiterates its ‘buy’ rating for Starheal, with a one-year target price of Rs 700, premised on 31x FY25E EPS. 

ICICI Lombard has been investing in the retail health business by hiring over 1,000 agency managers. This investment is anticipated to drive stronger premium growth over the medium term. Consequently, the report maintains a constructive outlook on ICICI Lombard, with a ‘buy’ rating and a one-year target price of Rs 1,550, based on 30x FY25E EPS. 

The Indian health insurance sector is witnessing positive trends, with increased hospitalisations and a decline in average stay. The report by Motilal Oswal highlights the importance of pricing, business strategies, and control on fraudulent claims for driving profitability in the sector. Starheal and ICICI Lombard are identified as key players with significant growth potential, owing to their focus on retail health, specialised products, and enhanced fraud detection capabilities. With strong premium growth and improved pricing, these companies are poised to deliver promising returns for investors in the medium term.