What is the best business insurance?
2018-02-06 00:00:00 UTC
In the insurance industry it’s fairly common to come across articles that talk about the best insurance cover or the most important insurance covers o get. While many of these articles raise certain valid points, we at perilwise wanted to approach this topic from a different angle , i.e the policy holder’s perspective.
What do we mean by “best ” or the most important cover?
When clients ask us what the best insurance cover is, they are looking for the kind of cover that is essential, for a risk that is very “real”, and not too abstract. So while considering what is the “best” insurance, we decided to look at insurers’ data; more specifically, their claims data.
The premise was very simple: If the insurance industry is paying out a high amount (%) of claims, then that product is very useful from the policyholder’s point of view. A high industry claims ratio means that all insurers are paying out significant claims for that particular type of policy, which in turn means that the risk is very real and the policy is worth taking.
All numbers in this article are from the annual report for 2016-17 released by IRDA. Claims ratio is defined as Net Claims incurred, divided by Net earned premium.
Essentially, it measures what percentage of the insurer’s premium collection is being paid out as claims. However, it needs to be emphasised that this doesn’t mean that this is the total return to the insurer, because of two reasons:
Investment returns: Insurance is a capital intensive sector, so after reserving for claims and expenses, the insurer generally invests the premium received. This return is not accounted for in the article. This component generates more revenues for the insurer.
IBNR: This stands for claims that are Incurred But Not Reported, claims that have occurred but are yet to be accounted for in the numbers. The IBNR numbers are significant in lines like liability and motor lines, where the claims process is tied to legal proceedings, and takes a very long time to resolve. This component generates more claim pay-outs for the insurer.
So after going through multiple reports, here are the 4 best insurance products from a business perspective:
1. Commercial Motor
Motor Insurance is compulsory by government mandate for all vehicles(third party liability insurance, or TP is). Third party liability covers any damage you might do with your vehicle to other people or their property. Third Party premiums are tariffed by the regulator. This means that the IRDAI(Insurance Regulatory and Development Authority of India) sets the prices of third party premium for each vehicle, and revises them annually.
Commercial motor, motor insurance for commercial vehicles(both goods carrying and passenger carrying), is generally loss making to the insurer, having a claims ratio of more than 100%. Commercial vehicles tend to cover a lot more distance than private ones, and are more likely to be involved in accidents as a result of the mileage they clock. This makes commercial motor insurance claims a long and complicated process for insurers, and impacts the entire commercial motor insurance line of business.
So if your business owns a goods carrying or passenger carrying vehicle, or a fleet of cars/bikes, make sure that your motor insurance is always up to date, because odds are that you will make a claim.
Health insurance is a hot topic in India today, with the government taking many steps to promote health insurance across the country.
We have written about the benefits of health insurance here & here before, but those articles were about individual health insurance. Individual health insurance is somewhat profitable to the insurer, especially stand alone products like critical illness insurance.
Group health insurance(also known as employee health insurance or group mediclaim policy) however, forms a good chunk of the health insurance business in india, accounting for 48% of the total health insurance premiums. A further 10% of the premiums come from government sponsored schemes. Both these verticals pay out more than the premium they collect. Even with individual health accounted for,health insurance’s incurred claims ratio is around 97% for the industry. This means insurers on average pay out 97% of their earned health insurance premiums in claims.
After discounting individual health insurance products, this number jumps much higher, making Group health insurance and government mandated schemes extremely beneficial for the policyholder, and loss-making to the insurer! Group health insurance is a very important policy that a company should take, its a milestone in the life cycle of a company. As evidenced by the numbers, it's an important benefit to employees, and will improve your company's retention and morale.
Property Insurance(Standard Fire & Special Perils)
Fire insurance, as it is commonly known, is a broad cover that covers property, furniture & fittings, and stocks of a business from fire, lightning, floods, storms, riots/strikes, malicious damage, theft, burglary, terrorism and more.
There are multiple add-ons that make fire insurance, or standard fire and special perils(to use industry parlance), a very versatile and wide ranging cover, capable of covering a large portion of a business’ risks. Check out Perilwise online fire insurance premium calculator here.
Fire insurance industry-wide operates on an 85% incurred claims ratio, which means insurers pay out 85% of the premiums they receive in claims. In fact, public sector insurers, who account for 80% of the Fire market, have a 93% claims ratio, which makes fire insurance one of the most useful products on the market.
Regardless of what type of business premises you have, whether it is manufacturing, retail(shop/store), or an office, a fire policy is extremely important and very useful to your business.
Marine Cargo Insurance, aka Transit insurance, covers your cargo/shipments (whether by land/sea/air) from damage. Marine Insurance is broadly split into ICC A, ICC B, and ICC C covers, each of which offers differing levels of protection.
ICC A: This is what is called an all-risk cover, where everything other than what is specifically excluded is covered. Exclusions are generally ordinary leakage/wastage, damage due to insufficient packing, wilful misconduct and delays Marine Insurance has an incurred claims ratio of 75% which means 75% of the premiums earned are paid out in claims.
ICC B: Covers everything that ICC C covers, in addition to earthquake, volcanic eruption or lightning
ICC C: Covers total losses, due to events like, Fire explosions, total derailment/overturning of vehicle, collisions, jettison, general average sacrifice, or discharge at a port of distress.
These 4 products are by no means the only insurance policies worth taking. In the end risk assessment is a very subjective matter, and it is important to evaluate what the specific needs of your business(or your personal/family needs) are.
For example, a notable exclusion from this list would be life insurance. We have said in other articles how term life is the best type of life insurance for individuals, and it truly is a very important aspect of protecting your family’s future. However, even term life insurance, by this metric is profitable for the insurer. This does not mean that term life isn’t worth it for the policy holder. The premiums being paid over a longer time frame makes the claim ratio calculation different, and so this metric fails for life insurance.