Words like Claim settlement ratio and incurred claims ratio are frequently used in the health insurance industry. Claim settlement ratio is considered as a sign of trust on the insurance company when it comes to settling the claims, claim settlement ratio was used as a USP until recently to sell the insurance. Claim settlement ratio is published by the insurance companies in their websites whereas the incurred claims ratio can be obtained from the annual report of Insurance development and regulatory authority of India. The incurred claims ratio and the claims settlement calculated on the basis of age is the time taken by the insurer to settle the claim which is also reported in the IRDAI annual report.
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What is the Claim Settlement Ratio?
Claim settlement ratio is the number of claims settled by the insurance company to the number of claims received. The total number of claims settled would be calculated for a period of time against the number of claims received for that period of time. For example if an insurance company has received 100 claim requests and has settled 95 out of it, then the company is said to have a 95% claim settlement ratio. The claim settlement ratio is usually calculated by dividing the number of claims settled to the number of claims received.
There are many instances where the insurance companies close the claim with inadequate settlements leading to litigation of claims in the courts and other apex bodies. To achieve a good claim settlement ratio some insurance companies are settling the claims inadequately and showing the inflated claim settlement ratio to attract more customers. The claim settlement ratio is usually taken for a given period of time such as a financial year. Claims that are received at the end of the financial year might usually be settled in the next financial year and this might reflect in the claim settlement ratio.
There would be a spillover of claims to the next financial year reducing the overall claim settlement ratio of the insurance companies. It is not advisable to only consider the claim settlement ratio while selecting the insurance company as there might be claims that are inadequately settled but are reported as closed. For example, Mr. A has claimed for Rs.5 Lakhs but was forced to settle for Rs.2.5 Lakhs and the claim is closed leading to the claim being challenged in the court of law but the insurance company has closed the claim increasing its claim settlement ratio.
The biggest drawback of the claim settlement ratio is that it doesn’t take into consideration the claim amount which is settled by the insurance company. Small ticket claims gets settled faster when compared to big ticket size claims leading to inflated claim ratio.
What is the Incurred Claim Ratio (ICR)?
Incurred Claim ratio is the total amount of claims settled to the total amount of premium received in a given financial year. The incurred claim ratio would give an idea on the total amount of claims paid by the insurance company to the total amount of premiums received. Incurred claims ratio doesn’t give any outlook on the claim settlement behavior of the insurance company, it only gives an idea of the total amount settled by the insurance company for a particular financial year. Insurance regulatory and development authority of India published the Incurred claim ratio in its yearly handbook.
If the incurred claim ratio of an insurer is 80%, it means that the insurance company has settled Rs.80 towards claims out of Rs.100 received as premium for that financial year. The remaining Rs.20 could be accounted for other expenses such as administrative expenses and profits for the company.
If the incurred claims ratio of an insurer is 100%, then it means that the insurance company has settled Rs.100 towards claims out of Rs.100 received as premium for that financial year. This means that the company is not making any profits as the entire premium amount received is spent for settling the claims. The other expenses that are incurred towards operating the company are borne by the company from investors money or through other modes.
If the incurred claims ratio of an insurance company is more than 100% say 120%, then it means that the company has settled Rs.120 towards claims out of Rs.100 received as premium for that financial year. This could indicate that the company has suffered major losses for that financial year due to a catastrophe event or a pandemic or bad underwriting decisions. In any case the company is bound to settle the claims from its pocket and would soon increase the premium rates to counter the claim settlement ratio.
Incurred claim ratio between 50% to 100% means that the company is making decent profits through its underwriting decisions which would also mean that the premiums would not rise in the near future and customers would get a chance to avail discounts on their premiums. IRDA publishes the incurred claim ratio for every line of business for all the insurance companies in India. As per the recent IRDA report 2021-22 it can be seen that the public sector undertaking insurance companies have the highest ICR due to the bad underwriting decisions and high claim settlements. The overall ICR for public sector companies is 103.17 for the FY 2021-22.
The biggest drawback of the incurred claims ratio is that it doesn’t take into consideration the claim settlement time i.e. the time in which the claim is settled.
Which One to Consider for Health Insurance?
The main confusion among the customers while taking a health insurance policy is deciding the insurance company and it in turn depends on the claim settlement ratio and the incurred claim ratio. In our opinion it is not appropriate to consider either the claim settlement ratio or the incurred claims ratio as both of them do not take into consideration the time taken for settling the claims. The claim settlement ratio and incurred claims ratio are reported every year and it could be possible that a claim reported at the start of the year is closed at the end of the year and reported in the claim settlement ratio.
This way the claim settlement ratio and the incurred claims ratio would remain intact of their impression but the customer had to wait for a longer period of time to get the claims settled. Insurance regulatory and development authority of India has introduced the section “Status of Claims” to address this issue.
Time Bound Claims Settlement Ratio:
The Status of claim settled by the insurance companies is published by the IRDA every year in its annual report. This section contains the below items:
- Claims outstanding at the start of the period: This item describes the claims that are carried forward from the previous year and are outstanding for getting settled in this financial year. The number of claims that are outstanding would be mentioned under this item at the start of the period.
- Claims initiated/booked during the period: This item consists of the claims that are reported to the insurance company during the financial year. This section specifically mentions the total number of claims received by the insurance company.
- Claims paid during the period: This section contains the number of claims that are paid during the financial year.
- Claims repudiated during the period: This section contains the number of claims that are repudiated during the financial year. The more the number of repudiated claims, the less is the trustworthiness of the insurance company.
- Claims outstanding at the end of the period: Claims outstanding at the end of the year are mentioned in this section. These include the claims which are yet to be settled by the insurance company and are carried forward to the next financial year.
- Age analysis: This section contains the number of claims that are settled within a given period of time. There are different time periods under this such as < 3 months, 3 months to 6 months, 6 months to < 1 year, 1 year to <3 years, 3 years to <5 years & >=5 years. This section describes the speed of claim settlement by the insurance company. The number of claims paid should be higher within the first 3 months which indicates the claim settlement capability and intention of the insurance company. The age analysis is based on the percentage of the number of claims paid during a particular financial year. The age analysis is available for the standalone health insurance companies and customers can base their health insurance purchase decision partially to this.
IRDA should also include the partially settled claims and claims struck in litigations to make the customers understand the best health insurance company that can be trusted while taking the health insurance policy. The claim settlement ratio can be considered for the Group health insurance also when selecting the standalone health insurance companies. It is important to check the age analysis in addition to the claim settlement ratio and the incurred claims ratio.
