India’s health insurance industry seems to be going through difficult terrain. It has long been viewed as a reliable growth engine, however, a recent report by Elara Capital shows that both growth and profitability of this sector are under strain, challenging the optimism typically seen in this space. The private health insurers, for years, have operated on the assumption of an ever-expanding addressable market, especially for a country like India with a huge under-insured base. That assumption, it turns out, may have been too generous.
According to Elara Capital, the expansion of government-sponsored health schemes, like Ayushman Bharat, has altered the playing field. With large swathes of the population already covered under public health programmes, the room left for private insurers to grow is far more limited than previously thought.
What are the challenges?
1) Profitability at risk: The looming problem goes beyond the issue of growth. The report notes that profitability is at risk as well for multiple reasons. The first issue points towards a shift in the policy mix, wherein the industry is seeing long-term policies and renewals rather than fresh inflows. On top of this, there has been a rising clout of hospitals and intermediaries like insurance distributors. Both these factors, combined, would squeeze the margins across the insurance industry.
2) Steeper Competition: Adding to the pressure is the potential rise in force competition where entry of the Life Insurance Corporation (LIC) into the health insurance market, combined with expected moves by other life insurers via composite licenses, could unsettle traditional standalone health insurance companies. These players, once dominant in their niche, may now find themselves up against deeper-pocketed rivals with a wider reach.
The central government in Budget 2025 cleared the way for 100 per cent foreign direct investment in the insurance sector, up from 74 per cent. This factor alone is expected to bring more players into the market and steeper competition for domestic players.
3) Rising Cost of Claims: Post-Covid, there has been a shift in the claim trends of India, which has also become a source of concern for the industry. As people are getting more aware of healthcare vis-a-vis diagnosis of critical illnesses such as cancer and cardiac conditions, claim volumes and severities are on the rise. On the part of insurers, this pushes up their loss ratios, which remain high.
And hospital dynamics aren’t helping either, occupancy rates have jumped from 52 per cent in financial year (FY) 2021 to 64 per cent in FY25. Meanwhile, average revenue per occupied bed (ARPOB) is climbing at a healthy clip of around 10 per cent CAGR, escalating the cost burden on insurers.
For investors, the report has a clear takeaway: temper your expectations. The once-promised broad-based growth story may not play out as projected. Instead, more resilient corners of the ecosystem like third-party administrators (TPAs) and diversified general insurers may offer better stability and margins, it states.
All things considered, India’s health insurance sector is in the midst of a structural reset. While the story is not over, it is certainly changing tone, from one of bullish, uninterrupted expansion to one that demands a more measured, selective approach.
