Under its experienced and canny CEO, Star Health Insurance has made a series of contrarian bets. Paydirt seems to be close by
On the fifth floor of a nondescript corporate building, opposite Chennai’s captivating “Valluvar Kottam” memorial to the legendary Tamil poet Thiruvalluvar, sits a calm and measured man who started his company in 2006. He entered a crowded field — insurance — where competitors could often be ahead of you by millions of customers, billions in revenue or decades in experience.
Yet Star Health and Allied Insurance, the company started by the unassuming V. Jagannathan, ex-managing director of public sector company United India Insurance, is today clocking Rs. 1,250 crore in revenue, making it the largest pure-health insurer in India.
“I cover over one-tenth of India’s population, no other company does that. By next year, we want to reach Rs. 1,750 crore in revenue and Rs. 2,500 crore the year after that. Once I touch that then there is no looking back,” Jagannathan says matter-of-factly.
How on earth did a four-year-old company with no big-brand international partnerships manage to pull this off in such a short while?
And, where’s the catch?
In Sickness, and Wealth
The market that Star Health decided to focus on was health insurance. Though now a Rs. 6,600 crore market growing at over 30 percent annually, it was “traditionally” considered a loss-making space by most public and private insurers.
The reason, says Sudip Mukhopadhyay, head of health strategy at Mercer, lay in the attitudes of the four state-owned general insurance firms that started offering health insurance back in the 1980s. Their fat profits came from products like property or fire insurance, where premiums were “fixed” as part of a tariff regime. Health insurance in contrast was de-tariffed from the beginning, hence offered no low-hanging profits.
Public sector insurers used this pricing freedom as a customer acquisition tool to break into large corporates, offering huge discounts on employee health insurance in return for assured profits from property and fire insurance. Gold-plated group policies were written out, offering coverage of pre-existing illnesses and even in-laws, with blatant disregard for economics.
“Very soon, they were writing their entire health insurance business at a loss but happy as long as their aggregate business was in profit. They said health insurance cannot be run at a profit. But the real reason was because they never understood or invested in it,” says Mukhopadhyay.
Insurers used to pay out Rs. 150-200 as claims for every Rs.100 they collected as premium. This trend continued even after the entry of private insurers because they too fought hard to win over corporate business.
But this arrangement came crashing down over the last few years. De-tariffing started in 2007 taking away the profit cushion that allowed health insurance to be cross-subsidised.
“There was a drop of 70-80 percent in tariffs in areas like fire or marine insurance. It was open warfare. In fact, we refused to broker reinsurance deals because of irrational pricing,” says Mukhopadhyay, whose firm Mercer as well its sister firm, insurance broker Marsh, sat in the thick of this action.
Last year, the finance ministry issued an ultimatum to all public sector insurers asking them to show ‘underwriting profits’ within three years. Combined with an order from regulator IRDA (Insurance Regulatory and Development Authority) to disclose underwriting results per product line, public sector insurers started scrambling to stem losses from their health insurance portfolio.
This resulted in corporate health premiums rising between 50-200 percent in just the last year, says Mukhopadhyay. Corporates cut back on employee health insurance, asking employees for greater “co-pay” and by reducing the number of family members covered.
“The shift from corporate to retail is already happening. Lots of corporates are now telling their employees to buy their own individual health covers. Because of this health seems to be
the only insurance category for us that is starting to show some ‘pull’,” says Girish Batra, CEO of NetAmbit, one of the largest third-party insurance distributors in the country. The waning of corporate insurance suits Star Health just fine, given that Jagannathan almost presciently decided to stay clear of corporate customers since 2006.
From Insider to Contrarian
Insuring the Masses
(This story appears in the 17 December, 2010 issue of Forbes India. To visit our Archives, click here.)