India's health insurance sector faces growth and profitability challenges: Report

India's health insurance industry, once regarded as a strong and steady growth story, faces significant structural challenges.

A recent report by Elara Capital highlights that both growth and profitability in this sector are being negatively impacted, which may redefine the long-term potential of health insurers in the country. The report states, "India's health insurance industry, long seen as a secular growth story, is facing structural constraints in terms of growth as well as profitability."

One of the primary reasons for this slowdown is the overestimation of the total addressable market (TAM) for private insurers. Many experts previously projected a large market for private health insurance. However, the expansion of government-sponsored health schemes, which provide widespread coverage, has reduced the actual market available for private players. This has made it increasingly difficult for private insurers to grow at the previously expected pace.

At the same time, rising competition in the sector is adding additional pressure. The report indicates that factors such as a shift in policy mix toward older or vintage policies, along with the growing bargaining power of hospitals and insurance distributors, are affecting the profitability of health insurance companies. These trends are capping the margins of insurance providers.

Furthermore, the report notes the entry of the Life Insurance Corporation of India (LIC) into the health insurance segment, along with other life insurance companies expected to enter through composite licenses. This will heighten competition and could limit growth opportunities for traditional standalone health insurers (SAHIs).

Given these challenges, the report advises investors to lower their long-term expectations for broad-based growth in the health insurance sector. Instead, they should concentrate on more resilient areas such as third-party administrators (TPAs) and diversified multi-line private general insurers, which typically possess stronger business models and better profitability.​