Difference between Incurred Claim Ratio and Claim Settlement Ratio

While health insurance is a vital necessity for families and individuals, understanding the technical nuances can be a bit daunting. If you’ve gone through a number of insurance brochures and now find yourself confused with all the technical banter. Do not fear, you are in good company. Health insurance plans being vitally important can be an algebraic problem to solve at first glance. Unfortunately, many insurance companies take advantage of this complexity and are known to over-sell unintended coverage to unknowing customers.

A report by the economic times showed that almost 48% of all individual health insurance was either unhappy with their insurance plan or were paying considerably higher premiums. For customers to make the most informed decision about which health insurance to buy, it's vitally important to understand a few key elements. Incurred Claim Ratio (ICR) and Claim Settlement Ratio (CSR) are two such terms that play a deciding role when a policyholder files a claim. Unfortunately, the difference between incurred claim ratio and claim settlement ratio are clearly understood. Not knowing the difference between the two often leads to significant out of pocket expenses. This article helps policyholders differentiate between the two.

What is Incurred Claim Ratio (ICR)?

The ratio of the total value of claims settled by an insurer to the total value of premiums collected by them in a given period is what is called an Incurred Claim Ratio(ICR).

The example below will elaborate on how ICR is calculated: 

Let’s say Company A’s ICR is 75%. This means that for every ₹100 of premium collected, Company A pays ₹75 towards claim settlement. The remaining ₹25 is Company A’s profit.

ICR tells us about the ability of the insurance company to pay a claim. If the ICR is more than 100%, it means that the total value of claims settled is greater than the total value of premiums collected. This implies that the company is incurring losses and might find it difficult to financially sustain much longer. In this situation, the company will either increase premium payments or make fundamental changes to the policy to make it profitable. Such companies are more likely to reject borderline claims. Borderline risks are those policyholders who might be a potential risk for the company, so much so that the insurer needs to consider whether they should be provided with insurance or not. 

If the ICR is between 50% and 100%, it is the best ICR and a good sign that the insurance company has introduced a good product which is making a healthy profit. Additionally, this is a good indication that the company has taken great pains to educate customers about the claims process. As a result, customers would ideally know when to make claims and when not to.

If the ICR is lower than 50%, it implies that the insurance company is making exorbitantly high profit margins. This could be possible if the company is charging high premiums or rejecting claims or there are just too many exclusions. All of these are undesirable for a customer. Another less likely scenario is when the company has a very healthy pool of insured policyholders.

What is Claim Settlement Ratio (CSR)?

There is a clear distinction between ICR and CSR. CSR is the ratio of number of claims settled to the number of claims made. Let’s look at an example to understand this a bit better.

Company B has a CSR of 90%. This means that out of a total 100 claims filed, 90 have been honoured.  

CSR is another great way to measure the health of an insurance company. However, this data is not published by IRDA for health insurance the same way it does for life insurance. CSR data found on the websites for health insurance claim settlement ratio could indicate settlement for overall general insurance and not specifically health insurance. As a result, the CSR may not be a very clear picture of the actual successful settlements for health insurance claims. Another important point to consider is the CSR doesn’t take into consideration the time taken to settle claims. This means that although Company B may have a CSR of 90%; however, the claim settlement process might be 4-6 months. This could be a hassle for the insurer in the long run.

The factors that affect CSR are the total number of filed claims, claims that are settled out of the court, and payment in settlement vs payment in premiums.

What are the major points of difference between the CSR and ICR?

In order to make informed decisions about buying your health policy, it’s important to know whether a CSR will give you a better picture or an ICR. So let’s analyse the difference between the two in brief.

Where can you Find the Claim Settlement Ratio and Incurred Settlement Ratio?

The Insurance Regulatory and Development Authority of India (IRDAI) releases the incurred settlement ratio of all healthcare insurance companies. It provides an overall ICR of the company and individual ICR for several types of general insurance. The  IRDAI does not release CSR.

The official websites of insurance companies do release CSR data. However, the CSR, which is displayed on the website, is for general insurance and is not limited to medical insurance claims. Hence, CSR isn’t a true picture of the insurance claim settlement of the insurance company. 

Conclusion:

Armed with these facts and figures, you will be able to make informed health insurance decisions about your next insurance provider. In general, ICR is a better indication of the insurance company’s overall health. Make sure you go over the numbers carefully before signing the dotted line.