Incurred Claim Settlement Ratio

Incurred Claim Settlement Ratio

In most insurance articles, we advise checking the Claim Settlement Ratio and Incurred Claim Settlement Ratio before buying a health insurance plan.

Is it that important? Yes, it is.

Let us tell you why. Read this article to understand why it is necessary to check and compare the Incurred Claim Settlement Ratio of various general insurance companies.

What is the Incurred Claim Settlement Ratio?

The Incurred Claim Settlement Ratio (ICSR) is a crucial metric in the insurance industry, particularly in health insurance. It measures an insurance company's financial health by comparing the total amount of claims paid out to the total premium collected over a specific period.

It is the baseline for rating the performance of any insurance company.

Once a year, IRDAI publishes the Claim Settlement Ratio or Incurred Claim Settlement Ratio of every general and life insurance company.

Key Takeaways

• ICSR measures the financial health of the company. It assesses an insurance company's ability to handle claims by comparing total claims paid to total premiums collected.
• Consider other important factors besides ICSR, such as coverage, network hospitals, premiums, exclusions, and customer service, when choosing health insurance.
• ICSR is crucial for choosing health insurance as it helps assess financial stability, claim settlement practices, risk assessment, and policyholder protection.

How to Calculate Incurred Claim Settlement Ratio?

Companies and IRDAI calculate the Incurred Claim Settlement Ratio using a simple formula: dividing the total number of claims paid out by the premiums collected within the financial year.

ICSR = (Total Claims Paid / Total Premium Collected) x 100

Here:

• Total Claims Paid: All claims settled by the insurance company, regardless of whether they were fully or partially paid.
• Total Premiums Collected: The total amount of money the insurance company has received from policyholders as premiums.

Let's understand this with an example: An insurance firm receives Rs 10 Lakh in premiums and spends Rs 9 Lakh in resolving claims.

According to the Incurred Claim Settlement Ratio formula:

(Rs 9 Lakh / Rs 10 Lakh) x 100 = 90

So, the Incurred Claim Settlement Ratio of the company is 90% for that year.

Interpretations

• ICSR < 100%: This indicates that the insurance company is making a profit and can comfortably handle claims.
• ICSR = 100%: This means the company is breaking even, neither making a profit nor a loss.
• ICSR > 100%: This suggests that the company is paying out more in claims than it is collecting in premiums, which could be a sign of financial instability. While this situation might seem good for the policyholder in the short term, in the long run, the company could face financial difficulties or even bankruptcy.

How Incurred Claim Settlement Ratio Helps in Choosing the Right Health Insurance Plan?

The Incurred Claim Settlement Ratio is a key indicator for choosing health insurance. Here's why:

• Shows Financial Stability: A high ICSR indicates that the insurance company is paying out more in claims than it's collecting in premiums, which could signal financial instability and raise concerns about its future ability to pay claims. Conversely, an ICSR of less than 100% suggests the company is financially sound and can comfortably handle claims, which is a positive sign for policyholders.
• Shows Claim Settlement Practices: A low ICSR often correlates with efficient claim settlement practices, meaning the insurer is likely to process claims quickly and without unnecessary delays or complications. A high ICSR might indicate issues with claim settlement, such as delays or denials.
• Risk Assessment: A low ICSR can suggest that the insurer has effective underwriting practices, accurately assessing risks and charging appropriate premiums. A high ICSR, however, indicates that the insurer may have underestimated risks, leading to higher claim payouts than expected.
• Policyholder Protection: A low ICSR provides policyholders with greater financial security, as it indicates that the insurer is likely to be able to pay claims when needed. A high ICSR raises the risk that the insurer may not be able to meet its obligations, leaving policyholders vulnerable.

Overall, an Incurred Claim Settlement Ratio between 80% to 95% is generally considered favorable.

Deciding Factors: Things to Consider While Evaluating ICSR

When evaluating the Incurred Claim Settlement Ratio (ICSR), it's essential to consider the following factors:

• Ensure that all claims are accurately recorded by the company.
• Check the average time a company takes to settle claims.
• Consider the company's market tenure and experience.

Where to Check the Incurred Claim Settlement Ratio of Insurance Companies?

We have collected data and saved it in the data labs section of the PolicyX website. You can visit this section to check the Incurred Claim Settlement Ratio, along with other data like solvency ratio, insurance density, and premiums, to make an informed decision before investing in health insurance.

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