Claim settlement ratio Vs incurred claim ratio; know the difference

Investing in insurance these days is one of the smartest investments you can make. Furthermore, it can be a saviour in any unfortunate circumstance and save you from digging a deep hole in your pockets. Though buying insurance is a smart choice to make, the decision is not always straightforward. Several factors are to be considered while buying one.

Claims are the other end of the spectrum in the insurance world, and it is very important to understand and evaluate a company's claim settlement rate and process. Few insurance companies are labelled for excessive or unnecessary denial or rejection of claim requests while, there could be others that have long processing times or delays. This can put you into financial turmoil, which is not an ideal situation to be in.

Every insurance plan comes with benefits to attract customers, so when you check the policy details such as the coverage, premium and benefits of a health plan, it is also essential to check the Claim Settlement Ratio (CSR) and the Incurred Claim Ratio (ICR) of the insurance provider as well. It is very important to understand what these terms mean and the difference between them. Usually, many are confused between these two terminologies, which is why this article explains the terms in an easy way and also states the difference between the two.

What is incurred claim ratio?

The Incurred Claim Ratio (ICR) is the ratio of the net claims that are paid out to the net premiums earned. This means that the total value of each claim the company has paid is divided by the total of the collected premium amount for the same duration. Incurred Claim Ratio = Total Claims Incurred/Total Premiums Received. For example, if an insurer has approved a total claim of Rs 48 crores in the year 2021 against the total premiums of Rs 100 crores, then the ICR for 2021 for this insurer would be 48 per cent.

How to check this ratio of a specific insurer?

This ratio is released by the IRDAI (Insurance Regulatory and Development Authority of India) every year, and hence the ICR of any insurer could be obtained by going through the report released by the regulator.

What is the claim settlement ratio?

The claim settlement ratio is the ratio of the total claims that have been settled to the total claims received in that same year. Under this case, if the insurer approves the claim worth Rs 48 crores against the amount value of Rs100 crores, then the CSR would be 48 per cent. Claim settlement ratio = Net claims settled/total claims received

How to check this ratio of a specific insurer?

This ratio is not published by the IRDAI but can be retrieved from the insurer's official website.

Note: That this ratio cannot clearly depict any insurer's claim settlement.

Difference between the CSR & ICR

You might have noticed from the definition and the example that these terms could be very easily confusing. They almost resonate with each other but are very distinct. Here are some of the key differences between CSR and ICR:

Claim Settlement Ratio Incurred Claim Ratio

CSR is the total claims settled against the total claims received

ICR is the total premiums received against the total claims incurred

CSR is not an ideal parameter to determine the intent of an insurance company ICR is more reliable and ideal for establishing any insurance company's intent

CSR is published by an insurance company on their official website

ICR is published by the Insurance Regulatory and Development Authority of India (IRDAI) in their annual report

Key things to consider

• Many policy seekers usually believe that a higher CSR means the better would be the insurer. However, one must never consider this as the primary criterion while selecting any insurer. A couple of factors such as customer experience, total time for the claim to process etc are also critical while filtering the ideal insurer. Also, since the CSR is not published by a regulated body but posted by the insurance company itself, it cannot be completely reliable. Without context, a CSR could be misleading.

• Moreover, since the time factor is not considered while calculating the ICR, a company which good ICR might have taken a long duration and vice versa. In addition, this calculation is not apt for insurance newbies as they would not have made sufficient revenue in the initial days of operations. Therefore, the ICR would be significantly higher and cannot be considered an ideal parameter.

• Just like ICR, the time factor is not considered in CSR; hence companies with higher CSR might take a long to settle the claims.

Bottom line

Both these ratios might not always help you understand the insurer's success ratio appropriately. However, it can surely help you with an insurer's efficiency. Hence, it is recommended to check these ratios beforehand and choose a reliable insurer accordingly. It is always best to conduct thorough research, read about customer experience, and find out more information about claim processing timelines and rejection rates. When these things are added in the context of CSR and ICR, you have a clear picture that helps you make an informed decision.

(The author is currently working as Director, Probus Insurance)