Buying a life insurance policy? Don’t go just by the claim settlement ratio of the insurer and ignore other parameters
By Sunil Kumar Singh
Contains comments by SecureNow Insurance Broker
LIC 97.42%, SBI Life 95.48%, Kotak Mahindra 92.10%, Bajaj Allianz 90.61%, Aegon Religare 66.06%, HDFC Standard 96.17%. Wondering what this means? Well, this is the percentage of the death claims life insurance companies paid out in 2011-12 out of the total claims they received.
But if the death claim settlement ratio is the only factor that you look at before picking or not picking a life insurer, you could be making a mistake.
First let’s understand first what the death claims settlement ratio indicates and what it doesn’t. Death claim Settlement is the payment of claim amount by a life insurance company to the nominee of the insured. Claim Settlement ratio, expressed in percent, means the number of claims settled by a life insurance company out of the total claims received during a particular period, normally a year. For instance, in a given year, if a company receives 100 claims but settles 80 claims out of 100, it means the claim settlement ratio of the company is 80%.
As per IRDA’s latest annual report for 2011-12, the 24 life insurance companies settled 8.22 lakh claims on individual policies with a total payout of Rs 8,409 crore. The number of claims repudiated stood at 19,133 amounting to a total of Rs 451 crore
Claim settlement ratio tells a lot about the insurer. Not only it is one of the critical parameters to judge the insurance company’s efficiency, it also gives a glimpse into the claim assessment, survey and claim underwriting processes of the company.
However, this ratio hides more than what it reveals. Let’s see how. First, the claims ratio of a company is the sum total of all claims honored by the company, irrespective of the type of policy it sells – online term plans, offline term plans, endowment, money back, child plans and more – all put together. This means you can’t know the claim ratio of an individual segment such as a term insurance plan or an endowment plan specifically, if you wish to.
As Kapil Mehta, Managing Director & Principal Officer, SecureNow Insurance Broker says, “The number is an average of claims across products and sizes. Group and individual claims get treated the same as do online and offline insurances. In reality the claim repudiation of an insurer can vary dramatically across products. I wish insurers would declare this information to the next level of detail.”
Secondly, the settlement ratio gives you figures in percentage, not in actual numbers. So you don’t get an idea of the how many claims the company received and how many it rejected. For instance, if company ‘A’ rejects 10 claims out of 100 claims made, its settlement ratio is 90%, lower than company ‘B’ that rejects 500 claims out of 10,000 claims but still having a settlement ratio of 95%.
Thirdly, one should also keep in mind that claims settlement ratios are somewhat dependent on the longevity of an insurer’s portfolio. This means the longer the company has been in the market, the better is its claim settlement ratio. On the other hand, a company normally has a low claim settlement ratio in its initial years of operations.
As Swapan Khanna, co-founder of I-Save, insurance research and analysis firm, says, “All early claims or claims that occur within two years of taking a policy are bound to be investigated since the probability of deliberate fraud in such cases is higher. For newer companies, by default, most claims fall into this bucket and may end up taking a longer time to be settled resulting in a lower settlement ratio during the early years of operations.”
Fourthly, claim settlement ratio is not static and it varies from one year to another. So if you are planning to pick up an insurance company as it has higher ratio than others, keep in mind that this might change next year.
Fifthly, the importance of claim settlement ratio depends upon the sum assured of the insurance too. Claim repudiation tends to be much higher in insurances with low face values. As Mehta says, “Higher sum assured insurances typically have lower repudiation because the insured undergoes medical check-ups before the insurance is issued. This immediately reduces the basis on which an insurance can be repudiated.”
Apart from this, different insurers have different settlement ratio primarily because of factors such as the product structures and distribution channels used.
Focus On Needs
Most of us compare the claim settlement ratio of different companies and go for one that has a higher ratio compared to its peers, falsely assuming that if the claim settlement ratio is good the claim would also be easily settled. This is nothing more than a grand myth!
Experts say there is no guarantee that if the ratio is high your experience will also be good. Similarly, if the ratio is low, it may not necessarily mean that your experience will also be bad. If you do not withhold material information or misrepresent, there is no reason for bad experience. Thus, more important than wracking your brains on comparing how much claim ‘X’ company repudiates is focus on factors that are more important than the claim settlement ratio.
“While choosing a life insurance policy, one should consider their need, the type of policy and whether it suits their need, understand all terms and conditions of plan like cover amount, premium paying term, policy tenure and hence the date of maturity, tax benefits, flexibility etc. and not depend on claim settlement ratio alone,” says Deepak Yohannan, CEO, MyInsuranceClub.com.
Adds Khanna, “Whilst it can be one of the factors to be considered when choosing an insurer, it cannot and should not be the only one. A higher focus should be on evaluating the cost and benefits associated with the product offering and ensuring that you are buying something that meets your needs at a competitive cost.”
Experts say the importance of settlement ratio also varies depending on whether the life insurance policy is bought for protection or investment. In case of protection products such as term insurance, claim settlement becomes far more important. In this case, when buying term insurance you must compare price per sum assured in addition to claims repudiation.
“Generally pick the cheapest term insurance where claim repudiation ratios are in single digits. If the insurance you are purchasing is investment oriented then definitely consider returns and surrender values. For returns, ask your investment advisor to give illustrative IRRs [Internal Rate of Return] over time. Also, ask what would be the surrender penalties if you change your mind in the future and want to terminate the insurance,” advises Mehta of SecureNow Insurance Broker.
On the other hand, highly investment-oriented products will typically have better claim settlement since the death benefit is a small component of the entire package.
Not The Sole Decider
All insurance policies are regulated by the IRDA and a high claim settlement ratio does not guarantee that your claim would be settled, even if there is any wrong information shared by you. So your effort as a policyholder should be to minimize any chance of claim rejection by divulging all information regarding your health.
“The most important consideration for a good claim experience is to be diligent in filling up the form, answer all questions with full honesty and provide correct information regarding self and family. Is these steps are followed claim settlement would just be a cake walk! If you share incorrect information, no matter what the claims ratio of the insurance company is, you will face hurdles when it comes to claims,” Yohannan adds.
Experts say claims settlement ratios do not have any bearing on the assessment of a claim, which will always be assessed on the basis of the merits of that case. One should, at the time of taking an insurance policy, make sure that all relevant information and disclosures have been provided to the insurer. One should not hide any relevant information whether medical or financial in nature or provide any false information which can result in repudiation of the claim.
As long as an insured has provided complete and accurate information at the time of purchase of the policy and the claim is a genuine one, it will be settled by the insurance company.
“Insurance contracts are entered in good faith and what you submit as information as part of your proposal form and related documentation forms the very basis of your insurance policy. Any inaccuracies (wilful or otherwise), fraudulent practices, concealment of relevant information or any misrepresentations can lead to a rejection of claims at a later stage,” adds Khanna.
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