Claim Settlement Ratio
Wondering which Life Insurance company to choose? This is a difficult choice, isn’t it? There are 24 insurance companies out there, all battling each other with claims that their products are THE BEST in market. Of course we cannot deny that they indeed come up with some amazing features and benefits whenever they add a new product to their portfolio but, features and benefits should not always be the parameters for judging a company.
From a customer’s point of view, all that matters is that the insurance company stands up to its promise and pays out the sum assured at the end of the policy term. It is become of this reason that taking claim settlement ratio during policy purchase is important.
So, what is claim settlement ratio?
Claim settlement ratio is defined as the percentage of total number of claims that an insurance company pays out in a particular financial year against the total number of claims it receives in the same fiscal year plus the total number of claims that were pending settlement in previous financial year.
If we put this in an equation, we will get:
Claim Settlement Ratio (CSR) = [[Total number of claims paid out (CP)] ÷ [Total number of claims received (CR) + Total number of claims pending settlement (CPS) from last year]] x 100
Therefore the mathematical representation becomes:
Let us take a quick example:
If the number of claims received in a given financial year is 200, the number of claims pending settlement from previous year is 20 and the number of claims paid out is 214 then:
CP = 214
CR + CPS = 220
Latest claim settlement ratio data:
IRDA released the claim settlement ratio for fiscal year 2013-2014 on January 8, 2015 in which LIC topped the list followed by ICICI Prudential Life, HDFC Standard Life, Max Life, Star Union Daichi, Bajaj Allianz and SBI Life in order.
LIC topped the list with 98.14% claim settlement ratio. The worst of all was DLF Pramerica with just 22.14% claim settlement ratio.
So, what does claim settlement ratio reflect?
It actually works as a reputation indicator for a company when it comes to paying out insurance claims. Working with a single year’s data will never give the right picture about a company’s claim payment habits. It is always advised to look at the historical data for at least 5 years.
The company that consistently shows a good claim settlement ratio is definitely the one you should look at. There may be instances when a particular insurance company shows bad CSR for one year but again recovers back with good settlement ratio for following years. This bad result for a year can be due to n number of reasons that may just show up out of nowhere.
However, if a company consistently shows bad claim settlement ratio, it is something you should worry about.
Let us take a look at the CSR of DLF Pramerica:
The above table shows that DLF Pramerica has been consistently bad at paying out insurance claims. This is something you really need to worry about.
Now let us take a look at SBI Life:
Except for FY 2010-2011, SBI has maintained a good CSR. There could have been many reasons for the bad results but the company leaped back and maintained a good ratio after that.
So in essence, claim settlement ratio actually tells how an insurance company treats it customers. No matter what kind of promises a company makes while selling its products, what really matters at the end is how it treats it customers after it manages to sell its products to them!
How trustworthy is claim settlement ratio data?
Well, by trustworthy if you mean accuracy then, there is absolutely no reason why you should be worried about it. This data is released by IRDA – the regulatory body for all insurance company operating in India and hence, the data IRDA releases is always accurate.
However, if the definition of trustworthiness is based on the question: ‘should I be purchasing a policy based on the claim settlement ratio?’ then, you deserve to know the following things:
- It is only a piece of report. All we see in it is pure numbers. No reason is cited for the low CSR. Claims can be rejected for a number of reasons like the customers concealed data or provided incorrect information or perhaps faked death to get the insurance money.
- This data is calculated by taking account of all types of insurance products sold by any insurance company, which include, but are not limited to – group insurance schemes, money-back schemes, term life insurance schemes, child insurance schemes etc. So, if you are thinking of a particular type of policy, you would be better off looking at CSR for that particular policy category. Such segregation is not available.
- It never mentions whether the claim was paid out within a few days from the date or claim or whether the claimants had to wait for the whole year to get the money. The sooner you get your money, the better it is! Isn’t it?
- The report never mentions whether the claims were early claims or not. Early claims are always put through strict scrutiny because insurance companies find it very suspicious when claims for a policy are made within a year or two after the policy goes live. It is during strict scrutiny that insurance companies find evidence ofincorrect information, information concealment etc. and reject the claims. For new companies, this leads to quick increase in rejection rate and hence low CSR. Old companies however make up for such increase in rejection rate with their other policies that have been functional for years. Thus, old players or the industry will always manage to offset low CSR caused by early settlement claims by the CSR of the good old schemes that have been active for their full terms.
Despite the aforementioned shortcomings of the claim settlement ratio data released by IRDA, it still remains a very strong tool to determine how a company treats its customers and one should always take account of CSR while purchasing insurance policies.
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