Claim settlement ratio - a tool to pick the right insurer

Favour foresight.

When an accident or unexpected event occurs suddenly, it can cause injury, harm, or even death leading to loss of income. Life insurance provides financial support in such an event, as the claim amount compensates for the future income loss, playing out a crucial role in modern society.

It is most important to choose the right life insurer that will honour its promise of paying the claim amount on time and fully.  One of the measures to gauge this is the claim settlement ratio. In simple terms, it is the percentage of claims settled per the total number of claims received in a year. 

A high claim settlement ratio indicates the insurer’s track record and hence intent in honouring claims, reposing consumer trust in the brand.  While the claim settlement ratio provides consumers with an indication of a company’s willingness to pay valid claims, it should not be taken at face value. This is because the claim settlement ratio can temporarily be skewed by volume or factors beyond the control of the insurer as well as high claim pending periods. An insurer may record a higher claim settlement ratio during a particular quarter than it did during the previous year. 

One of the major factors that drive a claim settlement ratio is disclosing all material facts about the Insured’s health, past Insurance cover, and details on occupation and income in the proposal form while availing the cover. Material disclosure leads to an informed underwriting decision and a hassle-free and faster processing of claims. 

Claims settlement ratio is also viewed on the basis of claims’ value. It is imperative to note that the claim value may look distorted if any high-value claim gets repudiated due to non-disclosure of material facts by the Insured. In other words, this, in isolation, is not the right metric to be referred to. 

The annual claim settlement ratio is the key metric to be considered. Consumers should additionally focus on how the company has performed over time, for example, the last five years on the claim settlement ratio. This will reveal how consistently a high level of claim settlement has been maintained.

Persistency ratio is another key metric that consumers should consider while choosing a life insurer. This ratio measures the percentage of people who renew their life insurance policy annually, reposing their trust in the brand. 

One of the key persistency metrics is the 13th month persistency ratio or the percentage of consumers renewing their policies one year after buying them. This is most important since unsatisfied consumers are unlikely to renew their policies. Further, one should evaluate the insurer on other periods including the 25th, 37th, 49th, and 61st month, thereby gauging the quality of service and support over a longer period. It is not wrong to believe that insurance companies view this as a vital sales and service quality measure. Consumers can see this as a sign that the insurance company cares about their financial future. So, do check how a company is doing on the persistency front, apart from going deeper on the track record on claim settlement ratio.  

There are other factors that are important when choosing an insurer. You should consider the insurer’s reputation, financial stability, and product offerings. It is therefore crucial to conduct thorough research and compare different insurers before choosing one. By making an informed choice, one will have peace of mind knowing that any claim in the future will be handled fairly.

(The writer is Executive Vice President and Head of Operations, Tata AIA)