How to choose the right insurance company
There are more than 50 registered life and non-life insurance companies in India. Each of them offers a variety of insurance policies. Before choosing a policy, you need to understand whether the insurance company that you have chosen is good enough. This is because when buy your insurance policy, you will continue to pay premiums for several years. Itâ€™s a long-term relationship between you and the insurance company. Your insurance company needs to remain solvent for those many years. So, how can you choose the right insurance company? Here are metrics that will help you assess whether the insurance company is the right one.
Claim Settlement Ratio
This is the ratio of claims that were settled by the insurance company to the total number of claims filed in a financial year.
So, claim settlement ratio = Number of claims settled divided by number of claims received.
It helps find out how good the company is at settling claims. For instance, if the claim settlement ratio of an insurance company is 95%, it means that 95 claims, out of the 100 claims that were filed, have been settled. The rest of the claims, which is 5%, have been rejected by the insurance company or are pending. The higher the claim settlement ratio, the better it is. A claim settlement ratio of more than 90% is considered to be good.
The corollary ratio is the rejection ratio which will help you find the percentage of claims rejected. Note that new insurance companies will have a lower claim settlement ratio. Why? Most of the time these companies get a lot of fraudulent claims. So, the claims get rejected. This means lower claim settlement ratio and higher rejection ratio for them. So, you cannot use this metric for assessing a new insurance company.
Incurred Claims Ratio
This is a ratio that compares the claims to the premiums gathered by the insurance company to see if the company is getting enough money to pay its claims.
The incurred claims ratio = total value of all claims paid by the insurance company divided by the total amount of premium collected.
This ratio shows the companyâ€™s ability to pay its claims. For instance, if the incurred claims ratio is 94%, it means that for every Rs. 100 collected as premium by the company, it has spent Rs. 94 on claims. This ratio is calculated every financial year.
The lower the incurred claims ratio, the better it is. If the incurred claims ratio is more than 100%, the company is obviously paying more money than the money collected from its customers. Ideally, incurred claims ratio should be anywhere between 75% and 90%. In the initial years, new insurance companies will have a low incurred claims ratio as the premiums collected will be lower.
As per guidelines of the Insurance Regulatory and Development Authority of India (IRDAI), all insurance companies are required to maintain a solvency ratio of 150%. A higher solvency ratio will lower the risks of the insurance company going bankrupt. This also helps assess if the company will have enough money to settle all its claims if it is liquidated. This ratio considers all the short-term and long-term liabilities of the insurance company. Higher the solvency ratio, the better your insurance companyâ€™s ability to pay its claims.
It costs money to run an insurance company. The expense ratio of insurance company = management expenses of the company divided by its premium. Management expenses will include commissions and administrative expenses. This is a cost that will be included in the premium of the insurance plans. Note that a high expense ratio will mean high costs for you as it will reduce investment returns for traditional insurance cum investment products. Companies that have a single-premium business have lower expense ratios.
The more the number of customers that pay premiums year on year, the better the insurance company is. Isnâ€™t that right? The persistency ratio measures how long customers continue their policies. It will help you assess if customers have been renewing their policies every year for a long time.
Persistency ratio = number of customers paying the premium divided by number of active customers, multiplied by 100. Persistency ratio is measured at different intervals. This could be the 61st month (5 years), 37th month (3 years), 25th month (2 years), etc. If customers have paid their renewal premiums promptly, the insurance company will have lower costs as it can enjoy economies of scale. Higher the persistency ratio, the more trusted is the insurance.
Note that these are not the only metrics you need to consider. There are many other metrics such as the time taken to settle claims and the ease of filing claims that will help you choose the right insurance company.
You need to take a comprehensive view of the reputation, financial strength and promoting entity of the insurance company when you choose a company.