Undercutting insulation between commutator segments is a common practice when rebuilding electric motors and generators. Unless the insulation is flush with the segments it's best not to undercut. If the insulation is flush with the segments it's really better to true the commutator on a lathe before undercutting. Usually on these starters a bit of cleaning up will do the job. A good way to clean up the commutator is to take a sheet of wet/dry sandpaper around 200-300 grit and pull it back and forth over the commutator like you were shining shoes. This method of sanding will help keep the segments level. If the segments look good a bit of polish with a typewriter eraser or even a pencil eraser will brighten them up. Don't use any metal polish on them and never use steel wool or brass wool because the metallic dust or particles can lead to shorting the segments.
I have rebuilt several and find that cleaning out the grooves with a screw driver of the right size works well and cleaning up the coppers with rubbing compound works too and less chance of scratching as can happen with sand paper...just be sure to clean up the grooves after you use the rubbing compound...
I have found that carefully chucking the armature shaft in a drill press,
and spinning the armature at a medium-ish (on the slow side) speed,
works really good when cleaning up the commutator. Use a very low
abrasion, (pencil eraser, toothpaste), and a light touch. Keeps everything
symmetrical and there is minimum material loss.
This approach has worked well for me, over the years. Ditto on the other
suggestions above, also.
Whatever you use to clean the commutator be sure you get all traces of any abrasives cleaned up. Toothpaste, sanding grit or what ever will make short work of the soft graphite brushes if you leave any in between the segments or on the wire connections to the segments.