India's retail health insurance market is entering one of its strongest expansion cycles in recent years, supported by rising healthcare costs, growing consumer awareness, expanding middle-class participation and favorable regulatory developments. Against this backdrop, Motilal Oswal believes Star Health and Allied Insurance is well positioned to capitalize on these structural tailwinds. The brokerage maintains a BUY recommendation with a target price of Rs 700, citing improving underwriting performance, disciplined pricing actions, robust fresh business growth, and the company's unmatched agency distribution network. Management's emphasis on profitable expansion rather than volume-led growth is expected to drive stronger earnings and improved return ratios over the coming years.

Retail Health Insurance Continues to Offer Massive Long-Term Growth Potential

Retail health insurance remains the fastest-growing segment within India's non-life insurance industry. Despite recording an impressive CAGR of around 18% between FY20 and FY25, insurance penetration still covers less than 5% of India's population, leaving enormous room for future expansion.

Motilal Oswal expects the industry to sustain annual growth of approximately 16-18%, driven by increasing healthcare inflation, greater financial awareness, higher disposable incomes and continued demand for financial protection. The recent GST exemption has further improved affordability, resulting in nearly 30% year-on-year growth during the second half of FY26 and continued strong momentum during April and May 2026.

Star Health Continues to Dominate India's Retail Health Insurance Market

Star Health remains India's largest standalone retail health insurer, maintaining a retail market share exceeding 30% for five consecutive years. The company has consistently expanded faster than the broader industry while significantly increasing the number of policyholders under coverage.

Fresh retail business emerged as one of the biggest positives during FY26. New business premiums increased nearly 37% year-on-year, supported by stronger policy values, improved customer acquisition and higher average insured amounts. Management also highlighted that recently acquired customers are considerably younger than legacy policyholders, improving long-term claims behavior and future profitability.

Customer retention has also strengthened meaningfully. Renewal ratios improved to 99%, reflecting stronger customer loyalty and increased adoption of higher coverage limits and additional riders. Meanwhile, digital channels now contribute approximately one-fifth of all fresh retail business, helping attract younger customers with better long-term economics.

Strategic Shift Toward Profitable Business Is Delivering Results

One of the most notable changes in Star Health's operating strategy has been its deliberate reduction of low-margin corporate group insurance business.

Instead of aggressively pursuing premium growth, management has shifted focus toward profitability by exiting loss-making corporate accounts while expanding within SME, MSME and benefit-based insurance segments where pricing discipline is stronger.

This transition has significantly improved underwriting quality. Group health loss ratios declined from nearly 91% in FY25 to approximately 79% during FY26. Although group business now contributes less than 5% of total premiums, management believes maintaining disciplined underwriting will create stronger shareholder value over the long term.

Agency Network Remains a Powerful Competitive Advantage

Star Health continues to possess one of the industry's strongest competitive moats through its extensive proprietary agency network.

The company now operates with approximately 830,000 agents across India while simultaneously improving agent productivity each year. Rather than pursuing rapid expansion alone, management is focused on developing productive, long-term agency relationships that generate sustainable business.

Digital distribution is becoming another important growth engine. Fresh business sourced through digital platforms has more than doubled over the past two years, with approximately 98% of digitally acquired customers being first-time insurance buyers. These customers generally require lower servicing costs while demonstrating superior renewal characteristics.

Additionally, Star Health has steadily expanded its bancassurance partnerships to 81 financial institutions, creating another meaningful distribution channel without compromising underwriting quality.

Underwriting Performance Continues to Improve

Perhaps the strongest positive emerging from the report is the steady improvement in underwriting performance.

Retail claims ratios have moderated following disciplined repricing initiatives and stronger contributions from fresh business. During FY26, retail claims ratio improved to approximately 68.2%, while management expects further gains as revised premium pricing gradually flows through the portfolio over the next 18 months.

The company has also expanded investments in preventive healthcare, telemedicine, home healthcare services and wellness programs. These initiatives are designed to reduce long-term claims frequency while improving customer engagement and retention.

Motilal Oswal expects the combined insurance service ratio (CISR) to improve steadily toward 98.3% by FY28, reflecting healthier underwriting margins and improved operational efficiency.

Regulatory Changes Could Favor Star Health

The insurance industry is preparing for significant regulatory changes, including IFRS accounting implementation, revised solvency norms and evolving commission structures.

Although IFRS reporting may introduce greater earnings volatility due to mark-to-market accounting for investment portfolios, Motilal Oswal believes Star Health remains comparatively well positioned because most of its investment portfolio consists of fixed-income securities.

Furthermore, proposed commission reforms are expected to impact insurers relying heavily on institutional distribution channels. Since Star Health derives much of its business through its proprietary agency network, the brokerage believes the company may benefit relative to several competitors as regulations evolve.

Financial Outlook Remains Strong

Motilal Oswal forecasts healthy earnings growth over the next two financial years as operating leverage improves and underwriting performance strengthens.

The brokerage expects insurance revenue to grow at a CAGR of approximately 16% during FY26-FY28, while profit after tax is projected to expand at an even stronger CAGR of nearly 32%, supported by better underwriting discipline and operating leverage.

Valuation and Investment View

Motilal Oswal believes Star Health is gradually evolving into a stronger and more disciplined retail health insurance franchise. Its combination of market leadership, improving underwriting quality, expanding digital presence, unmatched agency distribution and disciplined capital allocation creates a favorable long-term investment case.

The brokerage values the company at 26x FY28 estimated IFRS earnings and reiterates a BUY recommendation with a target price of Rs 700, implying an upside potential of around 22% from the current market price of Rs 575.

Investors should monitor improvements in retail claims ratios, fresh premium growth, profitability within the group insurance business, regulatory developments surrounding commissions and the company's ability to sustain operational efficiency. Continued execution across these areas could support meaningful earnings expansion over the medium term.