Incurred Claims Ratio – How useful is it in evaluating an insurance plan?

I recently received a comment on my health insurance post. Here it is.

Hi,

I read up on your comparison of health insurance policies. There are 2 statistics for the Royal Sundaram Lifeline Policy:

a. CLAIMS PENDING FOR OVER 6 MONTHS (% OF CLAIMS PENDING AS OF 31 DEC 2014) which is 21%
b. Incurred Claim Ratio of the Insurer being 52.89%

1. Can you please comment on the above and how key these parameter are.
2. Also, would you continue to have a positive outlook for this policy when the ICR is this low.
3. Can we, as individuals, be confident that our claims would be successful on time?

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Now, there is confusion galore with all the terms used by the insurance industry. The latest one is the Incurred Claims Ratio. I believe it has been confused with the Claims Settlement Ratio.

Let’s understand the difference between the two. 

What is the Incurred Claims ratio or ICR?

ICR is the ratio of all claims paid divided by all premiums received for a particular insurance account or policy or company. To understand it better, if an insurance company received Rs. 100 as premium in a particular year and paid Rs. 85 as claims to the policyholders, then its incurred claims ratio for that year is (85/100) or 85%.

So, the company is saving some money for itself and thus it appears to be a viable operation.

If claims paid are Rs. 110 for the same premium, then the ICR is 110%.

The question one needs to ask is if the company is paying 110, while it is receiving only 110, how viable is the operation. If you continue to pay your premiums, will your claim be honoured.

In this scenario, the company will seek to increase its premium so that it at least earns as much as, if not more, it reimburses in claims.

What if the ICR is 40%? It can mean 2, actually 3, things.

1. The company has managed to have its customers who are very low risk and haven’t been making many claims.
2. It is charging a higher premium and hence managing to save more.
3. The company has managed to reject several claims.

The company that does 2 or 3 is unlikely to be able to do so for long. The competition will ensure that.

Net, net the incurred claims ratio or ICR is less of a policy evaluation tool and more of an insurance business and policy viability evaluation tool.

For reference, below is the Incurred Claims ratio of non life insurers in India.

Now, what is the Claims Settlement Ratio?

The claims ratio again is a simple term. It is calculated as Total Claims Settled or Paid / Total Claims Received. So, if the insurance company received 100 claims and it paid out 91 claims in a year, the claims settlement ratio is 91%.

With this ratio, a higher number is an indicator of good customer focus and good underwriting practices. It appears that the insurance company is not using fake methods to deflect or deny claims to the policyholders.

A lower number, such as 70 to 80%, can be a cause of concern. If you find a number which is lower even than this, you should avoid that company like a plague.

Hence, the claims settlement ratio is a more relevant number to look at while evaluating your insurance policy.

Conclusion

Going back to the comment query of the reader, I am not concerned a lot about the ICR unless it is very high or very low. In the particular case that you mention, the ICR is 52.89%. As you will notice in the above table displaying ICR for various insurers, the average ICR for standalone health insurers is at 58%.

Also, the claims pending for over 6 months needs more scrutiny as to the type and nature of claims itself.

Incurred Claims ratio is more relevant to evaluate the financial health of the insurance company as well as the pricing of its products.

Read further: Comparison of 4 Health Insurance policies

More: Accident & Disability Insurance – What if you are unable to work?

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Between you and me: What is the basis you use to select your insurance policy? Do share in the comments.