Star Health Insurance, India’s largest standalone health insurance company, is looking to raise Rs 7,249 crore via an Initial Public Offering (IPO) comprising an offer for sale of Rs 5,429 crore from existing promoters. The Rs 2,000 crore proceeds raised from the fresh issue will be utilised to shore up its solvency ratio and business expansion.
In an interaction with Moneycontrol, Star Health Insurance’s Managing Directors Anand Roy and Dr S Prakash share their thoughts on the timing of the IPO, industry outlook, solvency margin, business expansion and valuation. Edited excerpts:
Insurance is a highly capital-intensive business. You have been in the industry for over 15 years. Given the impact of the pandemic, which is ongoing, what is the rationale behind the timing of your IPO?
Dr Prakash: We are strong in our fundamentals, and we don’t look at timing the market. IPO markets are volatile and it is challenging to identify the perfect time. Our model is unique and different, and we are the first standalone health insurance company to come into the market. We are pretty confident about the fundamentals around which we have built our company and the performance analysis done by our investment bankers. Based on all those interactions, there’s some benchmarking done with listed peers. Based on all of these, it’s a joint feeling we should not look for the right time in the market and when we go, that should become the right time.
To what extent have you revisited actuarial models considering the impact of the pandemic?
Dr Prakash: On the actuarial front, we are looking at the cost outgo — product-wise, geographically and disease wise. Whenever there’s a need or a product crosses a threshold, we are ready for a price revision. But we don’t want to burden the public with a price revision during these times and are trying to manage in the best way possible.
On the claims side, we are aligning with service providers — hospitals, particularly those that can handle Covid-19 patients; tertiary care hospitals, which can take care of critically diagnosed Covid patients requiring intensive care and monitoring. We are directly interacting with hospitals and trying to adapt WHO and ICMR guidelines and getting our customers the right treatment. On every front, we are equipping ourselves — from servicing to the sourcing aspect, many changes are happening.
On sourcing, what are the changes you are referring to?
Anand Roy: We had been growing faster than the industry even before the pandemic. We are a very large player in the segment. Given our large size, we have been able to maintain high growth. Last fiscal year and this fiscal year, we have seen a good growth rate. Having said that, we have seen new business segments opening up that were not actively available earlier. For example, people below 30 and 40 years of age — this segment is rapidly purchasing plans from us because the myth that young people don’t need health insurance has been shattered. Covid-19 has impacted all age segments.
Demand has been coming in from small towns and semi-urban areas. Earlier urban areas were dominant. So we have started a new rural vertical with custom-made products and a whole new distribution plan. We are well placed to capture the opportunity arising out of awareness.
How has the distribution strategy evolved? How would you go beyond agency?
Anand Roy: Health insurance in India is an assisted sales kind of product. Customers look for guidance and input before making the decision, and that’s where the agents play a vital role. Agents can guide the customer to make the right product decision and the coverage they might require. So, the agency model will continue to be mainstream for us. We are focusing a lot on making this model technology savvy, and that’s why we have seen rapid growth in digitally issued policies. The idea is to drive the adoption of our digital platforms from issuance to servicing.
We are also critically looking at bancassurance and digital platforms and have built teams for these channels. We expect these verticals will significantly contribute to our business in the years to come.
What kind of growth has the new retail platform recorded?
Anand Roy: The rural business is just one year old, and we have created a separate vertical. We are in the process of establishing a structure, opening 200 offices in rural areas, identifying those towns and villages. It will be a different model: digital-first. We don’t want too many physical offices. We want to maximise our presence in these areas. We have also tied up with partners in rural areas like CSCs and distribute through them, along with NBFCs and MFIs to deeply penetrate the rural market.
These are initial days, but we will build this very strongly. Around 3 percent of overall business will come from the rural vertical. We have designed specific products to cater to the rural population’s needs, trying to empanel hospitals in rural areas and see that a cashless facility is available in that region.
Your current solvency ratio is at 1.52. Where would it be post-IPO, and how do you intend to utilise the proceeds?
Anand Roy: As of September 30, our solvency ratio is 1.52. If we add Rs 2,000 crore, the solvency ratio will be 2.50. This will be sufficient to drive growth in the next three-five years and will be well above the minimum requirement. So, the Rs 2,000 crore will be available for expansion, and it’s factor-based solvency — the more you do the premium, the more capital is acquired. So, it will be entirely utilised towards premium growth, and as the company moves towards profitability, internal generation of capital will also keep on happening.
Next year onwards should be a normal year, including profitability, if there is no significant Covid-19 impact. The last five years, we have always been profitable. It’s the last couple of years we have been hit because of the Covid-19 pandemic and some accounting changes that happened. From next year, we expect to be back on track.
What are the trends on the group side? Do you intend to expand?
Dr Prakash: We will focus on group insurance as well. In the group business, the competition drives away the profitability, so we have to be careful about competition and identify micro, small and medium enterprises where there’s a reasonable profit based on our experience and track record and continue our business there.
We are retail dominant — close to 87 percent — and seek to add a 13 percent stake in group business. At the end of the day, the way we manage our business is by satisfying customers and making operations both growth and profit-oriented. That’s the plan; we will distribute business between group and retail but will not compromise on profitability.
How do you look at pricing? There are concerns that prices might increase in the coming days...
Dr Prakash: In our experience of 15 years, we have seen to it that every product we design we price appropriately, to the extent that in the next three-four years, there’s no revision required. As we design the product, we arrive at pricing based on the incidence of disease, the average we will pay, hospitals that will participate, policy conditions on what is allowed and not allowed... So, looking at all of these factors, we arrive at a probable loss ratio. And any product, when it reaches a probable loss ratio, we go for price revision. So, independently, any product we try and sell is viable and not loss-making.
Are you considering a price revision for any products?
Dr Prakash: Nothing as of now. We have got inbuilt ways of creating revenue from every product, because we charge a premium based on the age band. We also have differential premiums based on geographies, and a good percentage of our customers enhance the sum-insured when they come for renewal. All of these inbuilt mechanisms can give more revenue from existing products. In addition, we have a pricing arrangement with hospitals — like we try to get a contract for three years or two years. All these things help us to beat medical inflation on one end and continue the pricing so that our customers are not bothered with too frequent a revision in pricing.
Whenever we price a product,we don’t price it too high because the regulator does not allow profiteering. At the same time, we don’t price it very low. Making too much profit cannot be allowed, and very low pricing and experiencing a significant loss cannot be allowed as we handle policyholder funds, so we have to be careful. We design all of these things and go to the regulator only where we see a product in a loss-making scenario in our predictive analysis.
How do you view the surge in Covid cases in the West? Are you concerned?
Anand Roy: We are definitely following this and monitoring it, including data from the Government of India. However, we are not that concerned as the rate of vaccination in India is rapidly going up. The acceptance of vaccination in India is also very positive compared to many Western countries facing resistance. We are strongly positive that vaccination and standardisation of protocols will help us control any outgo in future. Even if there are limited spikes in India, we are well equipped to handle that today, much better than six months ago.
Lastly, given the market reaction last week to an IPO, are you concerned in the run-up to your own IPO?Nilesh (CFO): In terms of valuation, we have done a fundamental analysis of the business. Having spoken to a lot of investors during the roadshow, we have done a benchmarking exercise with listed peers, arrived at a valuation, and will be the only private standalone health insurance company to get listed.