ICICI Lombard's Strategic Shift Towards Health Insurance Promises Strong Growth

ICICI Lombard General Insurance, one of India's leading insurance companies, is on a path of strategic transformation that is reshaping its future. 

After merging Bharti AXA General Insurance into its fold in FY22, the insurer's primary focus is now on organic growth. 

In Q1 FY24, ICICI Lombard demonstrated its resilience and potential, posting an 18.9 percent growth in Gross Direct Premium Income (GDPI), slightly surpassing the industry's 17.9 percent growth in the same period.

The Motor Insurance Challenge:

Despite its commendable overall growth, ICICI Lombard faces challenges in the motor insurance segment, where it continues to lose market share due to sluggish growth. However, the company is turning the tide with a more significant presence in another lucrative sector - health insurance.

Health Insurance Emerges as a Growth Driver:

ICICI Lombard's health insurance segment has been the star performer, with premium growth soaring at an impressive 40.4 percent YoY in Q1 FY24. This growth was primarily driven by the group segment, outpacing the industry's 20.7 percent YoY growth in the same period. Health insurance has become the linchpin of ICICI Lombard's overall growth.

Expanding the Retail Health Segment:

To capitalize on the burgeoning retail health segment, ICICI Lombard has been expanding its distribution network by adding retail health agency managers. 

This investment has paid off, with retail premium growth reaching 22.8 percent YoY in Q1 FY24, surpassing the industry growth of 18 percent during the same period. The company anticipates further acceleration in growth as its sales force becomes increasingly productive.

The Financial Advantage of Health Insurance:

One of the reasons for the company's bullish approach to health insurance is its relative profitability. Health insurance typically boasts lower claims/loss ratios compared to motor insurance, making it a financially attractive segment. As ICICI Lombard shifts its product mix toward health insurance, it is poised for future profitability.

Within the health segment, the company anticipates higher traction in individual health indemnity products. These products have significantly lower loss ratios compared to group health policies. 

For instance, the loss ratio for group health stood at 95 percent, while for indemnity products, it was much lower at around 64 percent in FY23. Over the long term, health indemnity loss ratios are expected to remain in the range of 65-70 percent.

Long Runway for Growth:

ICICI Lombard has a long runway for growth in the retail health business, given its modest 3 percent market share compared to over 30 percent for Star Health and over 9 percent for HDFC ERGO. 

The regulatory advantage that standalone health insurers (SAHIs) enjoy with a higher expense of management limit further positions ICICI Lombard for future expansion.

Investment Opportunity:

Despite trading at a valuation of 6 times book value as of June, ICICI Lombard's growth potential remains robust. While the return on equity (ROE) has moderated to 15 percent from over 20 percent a few years ago, there are multiple levers for improvement. 

The growth in the health insurance business will enhance the insurer's overall underwriting performance and reduce the expense ratio as investments in the health distribution network yield results.

ICICI Lombard's strategic shift towards health insurance, combined with its continuous efforts to expand its retail health segment, promises a bright future for the company. 

Investors with a long-term perspective can confidently consider adding ICICI Lombard to their portfolios, as its premium valuation is likely to sustain and the stock price is expected to rise with improving return ratios. 

The company's growth trajectory in the health insurance sector positions it as a prominent player in the Indian insurance landscape.