Claim Settlement Ratio : What Insurance Companies Won’t Tell You

12. Claim Settlement Ratio

The Claim settlement ratio is renowned throughout the industry, being a measure of the number of claims an insurance firm pays during a certain timespan. To give an example, a score of 90 implies that out of 100 claims lodged in a year, the insurer settled 90.

This data point should be used as an indicator of whether your insurer will deliver on its promise in times of hardship. But be aware that insurance companies can be unreliable when it comes to this figure.

As an example, one public insurer reported an excessively high claim settlement ratio.

This ratio was attained using the formula:  Claims settled / (Claims booked + Claims outstanding at the beginning – Claims outstanding at the end). 

Paying close attention to this will show you how a large proportion can be achieved, even without speeding up claims.

Let’s presume that the insurer had a lot of unsettled cases at the beginning of the year, and the majority were resolved within twelve months. As long as last year’s claims have been handled, you won’t need to consider any new ones throughout the year. Even if your customer service isn’t up to scratch, it won’t impact your overall ratio negatively. 

This is indicative of the inefficiency of their procedures and tells you little about their settlement processes. Therefore, if this is your deciding factor, it’s worth reconsidering.

General insurers tend to combine figures from their various policies, such as health and motor insurance claims, into a single settlement ratio. However, stand-alone health insurers only report their health policy settlements — meaning they could be skimping on the health claims while still boasting high overall payout rates. If you’re considering a policy, it may be best to ask your insurer for specific numbers in order to make an informed decision.

Remember that the claim settlement ratio isn’t necessarily indicative of how much an insurer is paying out. Although a high score may appear to be an indication of good things to come, be aware that some insurers may use unethical practices to inflate it. This could involve settling smaller claims while denying costlier ones; thus, you might easily be deceived if you only judged based on the claim settlement ratio.

Rather than simply looking at the claim settlement ratio, it is beneficial to also consider the incurred claims ratio.

One way of measuring an insurer’s financial stability is by calculating the Incurred Claims Ratio (ICR). To do this, divide the total claims paid during a period by the premiums received. If an insurer is paying out Rs 120 for every Rs 100 taken in premiums, this may well indicate that they are making losses and may eventually run into trouble.

The regulator won’t leave policyholders stranded in a situation without assistance; they’ll intervene and force a merger. Though this can sometimes be an unpleasant experience, it’s important to remember that a high ICR is nothing to strive for.

Nevertheless, a high ICR should not necessarily be your ultimate goal either.

If you take a look at the insurer’s claim settlement ratio together with their ICR, it provides you with a comprehensive understanding of who is looking out for your welfare. This is due to the fact that if your company is paying out Rs 50 in claims for every Rs 100 they collect in premiums; it could suggest that they are trying to save money when dealing with large claims.

Insurance companies can easily claim to have high settlement rates when they are catering to only a few thousand customers. But what’s more important is if their services can still remain efficient and effective when the customer base increases to millions. 

In such cases, it is advisable to always check the customer base of your insurer before selecting one. This will help in avoiding any issue of settlements after the company begins growing rapidly.

Verdict: The claim Settlement Ratio should not be taken lightly, but it is wise to look into other factors before deciding. IRDAI’s yearly report gives you the most reliable figures.