2016-05-24 12:47:00 UTC
In our previous post on points to ponder before buying life insurance, we mentioned Claim Settlement Ratios(CSR) of your Insurer as something you should research before buying Life Insurance. Today we talk about CSR in general, and take a look at the CSRs for various Life Insurers.
Claim Settlement Ratio is the percentage of life insurance claims paid to nominees of policyholders by each insurer out of the total number of claims received by them individually. The insurers either reject the remaining claims outright for falsification, fraud, etc. or keep them in abeyance for resolution in the future.
The fact that, the Insurance Regulator of India, IRDA publishes the statistics annually lends credibility to this report. The report gives you an insight into the functioning of Indian Insurance Industry and lets you know how the insurers are performing when it comes to claim settlement. A new report is expected in June 2016 and the most up –to-date information available as of today was published back in 2015.
It is therefore no surprise that CSR is widely recognized as a yardstick for term insurance buying decisions. Specifically when it comes to term insurance claims, an insurance policy from a policy provider that does not pay out genuine claims is not even worth the paper the policy is printed on. Even if the premiums charged are extremely competitive, the very purpose of an insurance cover is to mitigate uncertainties in life, and that is defeated if your claim isn’t settled properly in a timely manner.
The IRDA annual report is very comprehensive and has many details that are not relevant to this discussion. The table below summarises the important parameters from the IRDA report, which require critical analysis and understanding.
Life insurance claim statistics, IRDA report 2014-15
The claim settlement ratios are only indicative and not fool proof. You should use these ratios with caution, as a broad-brush approach to interpretation of claim settlement ratios could be misleading and it is important to recognize and factor these shortcomings. There are limitations to relying only on Claim Settlement Ratios.
Firstly, the ratio is all-encompassing and is calculated based on all life insurance products and not just pure life insurance plans i.e. the number of death claims paid for term insurance policies, endowment policies, money-back policies, whole-life policies, children’s education policies and ULIPs are included in the calculation.
Therefore, claim settlement ratios favour the insurers that sell a large number of non-pure life products, as they have no qualms about settling claims on plans that involve only a small life insurance component. It is also worth recognizing the fact that customers purchased these products solely with the aim of maximizing returns on their investment rather than purely as a life insurance cover. The savings plan customers naturally account for the bulk of the death claim customers.
Secondly, most claim rejections occur when the claim is made in the first two years of a policy’s term. Insurers subject ‘early claims’ (claims made within 2 years of policy inception) to intense scrutiny. New entrants to the market will therefore have a larger percentage of ‘early claims’ in their overall product portfolio as compared to the entrenched and older insurers. Claims settlement ratios therefore favour older players and we have to allow some leeway for the new insurers to level the playing field.
Moreover, the table above reveals that the average sum of rejected claims is across the board significantly higher than the average amount of settled claims. This means, without exception, all insurers are cautious when it comes to resolving large claims. A 90+% claim settlement record does not provide much comfort to policy holders with large sums at stake, as these are susceptible to the risk of rejection by all insurers, notwithstanding their impressive track record when it comes to settling smaller claims.
1. Use the claim settlement ratio as one of the criteria for life insurance buying and not as the only yardstick. For reasons articulated above, an 80%+ ratio is reasonably good and setting the bar on claim settlement ratio very high is not desirable. This way you need not obsess with the ratio.
2. Claim Settlement time is an important parameter and it gives you an indication of how expeditiously the insurers will settle claims. Anything between 20-30 days is impressive.
3. Financial health is an important consideration and IRDA report includes solvency ratio for various insurers that tells you about the financial health of the insurer. Insurance brokers and advisors often factor this in their recommendations.
4. It is also important to understand the Policy Features and ensure there is alignment with your personal aspirations and individual circumstances.
5. All things being equal, a lower annual Premium is obviously desirable.