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Star Health Insurance Goes From the Hospital to the Bank

Under its experienced and canny CEO, Star Health Insurance has made a series of contrarian bets. Paydirt seems to be close by

Published: Dec 14, 2010 06:15:42 AM IST
Updated: Dec 9, 2010 01:51:05 PM IST
Star Health Insurance Goes From the Hospital to the Bank
Image: Gireesh GV

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
The 66-year old Jagannathan began his insurance career in 1969 as a management recruit, working across various public sector organisations in different roles before ending up as the chairman of public sector United India Insurance in 2000. After turning around a Rs. 1.5 crore annual loss to a Rs. 153 crore profit in his very first year, he took the company to a profit of Rs. 393 crore by 2004, its highest ever.

After he retired in 2004, the Dubai-based ETA Group approached him with a proposal to start a general insurance company under India’s newly liberalised regime. “I told them I would join them only if they started a health insurance company,” says Jagannathan. 

 Star Health Insurance Goes From the Hospital to the Bank

Infographics; Sameer Pawar

The idea to start a focused health insurance company in a country where health insurance was seen as a perennial loss making machine might have sounded suicidal to ETA but Jagannathan had figured out all the angles during his three decades as an insider. To allay ETA’s concerns he promised them profits from the second year onwards. ETA agreed.

Star Health has been profitable since year two.

The decision to focus on health insurance was Jagannathan’s first instance of many contrarian calls.

Star Health decided to not focus too much on corporate customers and only focus on retail health insurance. This was because he wouldn’t have profits from other products to cross-subsidise losses on employee group policies.

But Jagannathan’s most interesting decision was to focus on middle-income individual consumers.
 
Indians are heavily under-insured. More so when it comes to health insurance. Varying estimates place the number of people with health insurance covers at between 2-3 percent of the overall population, compared to nearly 5 percent for life insurance. Over 70 percent of the country’s healthcare spend comes from the pockets of individual consumers, compared to less than 10 percent in the USA and UK.

This is because middle and low income consumers relative to their incomes simply cannot afford the cost of hospitalisation. “The second biggest reason families fall below the poverty line is healthcare. Walk into most hospitals and you will find a family that has lost its entire savings due to one major illness,” says Mukhopadhyay.

Jagannathan says “almost 100 percent” of his retail revenue — around Rs. 350 crore this year — comes from middle income homes, for whom he’s priced products towards the lower end.

He can to do that because of two other contrarian decisions he made: Completely avoid working through third party administrators (TPAs) and perform crucial processes like claims processing and customer support fully in-house.

Jagannathan says TPAs hurt insurance companies. First they charge commissions ranging between 5-6 percent of premium. This means for the Rs. 350 crore of Star Health’s retail premium it would need to pay between Rs. 17.5-21 crore as TPA fees. Instead Jagannathan says his entire claims department’s payroll cost is only Rs. 5 crore.

Relying on TPAs leads to an insurer losing touch with its customers and the hospitals. This results in both higher claim costs as well as sloppier customer service.

A typical claim to Star Health will start from its call centre, then go to a medical team that examines the validity of the treatment followed up by one of its 180 company-owned offices across the country. The final leg is often a “field doctor” who physically visits the hospital to ensure the person being treated is indeed the customer and to have a discussion with the hospital on the treatment options.

The result: Star Health’s loss ratio is around 66 percent, compared to around 110 percent for most of his competitors, says Jagannathan. His company can also process hospitalisation “pre-authorisation” requests in just four to five hours.

Not surprisingly ICICI Ventures invested Rs. 120 crore in the company in April this year while there is talk of Sequoia too investing in it.

But all of these decisions pale in comparison to Star Health’s biggest bet — the below poverty line micro-insurance market. That outcome will determine whether Star Health becomes Indian insurance’s superstar or premature casualty.

Insuring the Masses
Of the Rs. 1,250 crore Star Health will earn as premium income this year, the largest chunk — between Rs. 700-800 crore — comes from an unlikely set of customers: Over 120 million people mostly below the poverty line.

Star Health did not hire thousands of agents to span the country to bring in these customers, but instead relied on the increasing number of state government schemes that seek to provide some form of health insurance to the majority of its citizens.

Mercer’s Mukhopadhyay says Indian central and state governments have realised they cannot afford to become universal healthcare providers to their citizens due to the sheer cost of doing so. So instead they’ve decided to become healthcare financiers, funding as much of major hospitalisation expenses for their poorer citizens as they can.

 Star Health Insurance Goes From the Hospital to the Bank

Infographics; Sameer Pawar 

At the state level two of the biggest schemes are Andhra Pradesh’s Aarogyasri covering 65 million people and Tamil Nadu’s Kalaignar Insurance covering 40 million people. Star Health is the insurer for both these schemes.

“I helped the Andhra Pradesh government in launching Aarogyasri, which helped it come to power with a thumping majority. And seeing that the Tamil Nadu government too launched Kalaignar. Today six-seven other state governments are in the process of launching similar schemes,” says Dr. Devi Shetty, founder and chairman of Narayana Hrudalaya who is also

the architect behind Karnataka’s Yeshaswini microinsurance scheme that covers nearly 3 million co-operative workers for a monthly premium of Rs. 10. “It’s only a matter of time before every state government becomes a health provider,” he adds.

But if providing such mass-scale insurance is a challenge for any insurer, generating profits out of it is a near impossibility.

One big reason is fraud. Jagannathan is trying to counter that by relying on stringent checks and audits by his own team of over forty retired cops, including senior positions like a Deputy Inspector General and Superintendent of Police, spread across Andhra Pradesh and Tamil Nadu. The team visits hospitals on a daily basis, checking on both the quality of healthcare provided as well as the identities of the patients enrolled through Star Health’s schemes.

The other reason profits can be tough to come by are the premiums, averaging between Rs. 350-450 per family covered. Mukhopadhyay says Mercer has done the actuarial analysis of such schemes and that they would become profitable only at between Rs. 1,000-1,200 annual premium per family.

(This story appears in the 17 December, 2010 issue of Forbes India. To visit our Archives, click here.)

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  • Http://www.licofindiapolicy.com

    I would like to thank you for the efforts you have made in composing this comment. I am going for the same best work from you in the future as well. In fact your fanciful writing abilities has prompted me to start my own blog now. Actually the blogging is spreading its wings rapidly. Your write up is a fine example of it. Regards, Rhea

    on Jan 18, 2011
  • Naveen

    Hi, I understand that Forbes is a business magazine and does not write politics. But, you could have factored in that ETA group is dubbed as a front for the DMK and is thickly embroiled in the 2G spectrum scam. The mass-coverage programs are well appreciated, but the contracts are highly likely to get cancelled when rival parties like AIADMK in TN or TDP in Andhra come to power. There are already questions being raised as to why the Government is giving hundreds of crores as premium to a private company when it could use this money to upgrade its hospitals? Note: I am not a detractor of this scheme, but write this letter only as a aware reader.

    on Dec 14, 2010
    • Sharavanan

      Dear friend, The government projects was given to a consortium of many Insurance companies including Govt. companies. Star Health is a part of it and being the provider and facilitator of the Scheme, the general public was made to believe as you had quoted by the politicians. You have to see from the Insurance point of view. First you have to understand the concept of Insurance, then the question of "upgrading the Govt hospitals instead of paying premium" would not arise.

      on Dec 15, 2010
      • Naveen

        Hi ! I would like to believe what you say, but since I have some knowledge on how politics in TN operates, I beg to differ with you. As I have said, I don't question the effectiveness of the scheme per se, but pointed out that the edit team could have factored in the political element in the story. Let us wait and see how the story enfolds after TN assembly elections which are not very far away! Cheers!

        on Dec 20, 2010