The incurred claim ratio (ICR) is the ratio of the number of net claims settled against the number of net premiums received in one financial year by the concerned insurer.
When you buy health insurance, it becomes paramount to verify whether or not your insurance company is credible. So, how do you decide which company is credible and which one is not?
The incurred claim ratio in health insurance is a major parameter used to assess an insurer’s financial health, credibility and overall performance.
Let us learn how to calculate ICR and what it indicates.
Incurred Claim Ratio: Meaning
The incurred claim ratio in health insurance is a formula used to demonstrate an insurance company’s financial soundness and well-being.
The ratio is a direct comparison between the number of claims settled and the number of premiums collected. It exhibits the insurance company’s ability to settle rightful claims to their policyholders against the insurance premium collected from them.
The Insurance Regulatory and Development Association of India (IRDAI) releases the ICR data of all insurance companies once a year.
Just like how you would use a health insurance premium calculator to make accurate calculations and determine the policy of your choice, you need a determining factor or parameter to decide the insurance company of your choice. ICR is that factor that helps you find the best, most credible provider for health insurance policy in India.
Factors of Incurred Claim Ratio
-
Net Claims Settled
The amount of net claims settled refers to the total value of claims that an insurance company has settled and paid out to the policyholders during a financial year. The amount is calculated by deducting the recoveries and reinsurance claims from the gross claim settlement value.
-
Net Premiums Collected
The amount of net premiums collected refers to the total value of premiums an insurance company has collected from its policyholders in a financial year. The amount is calculated by deducting any commissions, expenses, refunds or reinsurance payments from the gross premium received.
Incurred Claim Ratio: Formula
ICR = (Net claims settled ÷ net premiums collected) X 100
For example, let us assume that an insurance company earned a net premium of ₹50,00,000 and settled claims of ₹43,00,000 in one financial year.
The ICR = (43,00,000 ÷ 50,00,000) X 100 = 86%
Another insurance company that earned a net premium of ₹50,00,000 but settled claims of ₹48,00,000.
The ICR = (48,00,000 ÷ 50,00,000) X 100 = 96%
Let us understand what these ICRs indicate and which health insurance policy provider is more credible than the other.
Incurred Claim Ratio and What it Indicates
-
ICR More Than 100%
When we state that an insurance company pays an ICR of more than 100%, we observe that the company is paying out more money as claims than it is earning through premiums.
This is a clear indicator that the insurance company will not sustain itself in the long run. This ratio is also a sign of poor risk and financial management, indicating that the premiums and benefits do not align well.
-
ICR Less Than 50%
An ICR of less than 50% indicates that the insurance company is earning more profits and might be offering insufficient benefits and claim settlements. This ratio is not at all suitable for policyholders.
The policy provider may offer fewer benefits, has many exceptions, charges higher premiums and doesn’t settle claims rightfully. This can lead to a bad reputation. It is an indicator of a stable yet unfair financial management system.
-
ICR Between 50% to 100%
An ICR of more than 50% and less than 100% is ideal, and the best incurred claim ratio always lies between 70% to 90%. This ratio indicates that the financial and risk management of the company is credible and in good health. It also demonstrates the insurance company’s will and ability to pay out rightful claims.
Other factors also make a lot of difference. For instance, the duration of the claim settlement ratio, the types of insurance policies, new members and more. Credible and trusted companies like Tata AIG always perform well on such parameters.
Summing It Up!
The increasing inflation in the medical industry is an overriding issue. The only thing protecting you from it and other health emergencies is your health insurance policy. Your choice of insurance and insurer makes a lot of difference.
You have to leverage every resource possible, and the incurred claim ratio in health insurance is one such resource. The ICR offers valuable insight into the insurance company’s inner and financial circumstances and can allow you to make an informed decision when it comes to picking your insurer.