Calculating Incurred Claim Ratio In Health Insurance

In India, the health insurance industry is expanding. Customers have a wide range of health insurance options. Choosing the best health insurance policy can be overwhelming if you are new to investing in health insurance. Your purchasing decision is influenced by a number of factors, including coverage, exclusions, premium, network hospitals, COVID-19 coverage, etc. However, the most important factor to be taken into account before choosing health insurance is the incurred claim ratio.

What is Incurred Claim Ratio (ICR)?

We first need to comprehend what a claim is before drilling down further into the ratios. A claim is a formal communication that the insured sends to the insurance company to request payment of the sum insured in accordance with the terms of the policy.

The ICR is the ratio of the total amount of all claims settled by an insurer to the total amount of all premiums collected by the insurer over a given time period. Simply put, incurred claim ratio settlement provides information about the insurance provider's capacity to pay claims. Mathematically speaking, the formula for calculating ICR is-

ICR = Net Claims Incurred / Net Earned Premium

For example, if a specific health insurance provider approved claims totalling INR 700 crores in 2021 against premiums earned of INR 1000 crores, it would specify that the ICR in 2021 is 70%.

How to analyze the ICR value?

The Incurred Claim Ratio of an insurance company essentially discusses the company's financial stability. It shows the insurer's capacity to resolve claims. According to the ICR, this is how the company's financial performance appears:

a) If ICR’s value is more than 100%:

What happens if the ICR exceeds 100%? If the ratio is greater than 100%, the insurance company's financial situation is not good. It indicates that the insurer has paid out more in claim settlement expenses than it has in premium payments for health insurance.

Financially speaking, these are loss-making figures. The company cannot continue using this ICR bandwidth. They will suffer losses and soon begin to deny claims. To get out of this situation, these insurance companies will need to take drastic measures.

b) If  ICR’s value is less than 50%:

The insurance company is assumed to be favouring its own business over claim settlement if the ICR is less than 50%. Despite making significant profits, the company does not treat its policyholders well. In other words, the company has received a lot more premium than the claims it has been paying out. The claim settlement will be 0 to 50% of the total premiums received in a single year.

It's likely that the health insurance claim process will be less transparent and that the policy will be more expensive. As the policy might have many exceptions, there will be a high likelihood of a claim being rejected.

c) If  ICR’s value is between 50% and 100%:

The insurance company is considered to be financially stable if the ICR falls within the range of 50% and 100%. Using the total premiums collected throughout the year, the insurer can manage the settlement of insurance claims with ease. For both the provider of health insurance and the customers, this is the ideal scenario.

The cost of the insurance policy will be reasonable, and the handling of claims will be more open. The exceptions won't be overly restrictive and the policy will have a good selection of features. The process of settling claims will be simple, and most policyholders will be pleased. The ICR's ideal range is between 70% and 90%.

So, can we assume that the incurred claim ratio is an absolute parameter to make the selection decision? Actually, no. Although the Incurred Claim Ratio is a useful tool for gauging the performance of the company, it does not capture the full picture. So, what other factors should be considered?

Other Things to Consider:

One of the deciding factors when selecting a health policy can be ICR. However, it shouldn't be the only factor in your decision. A few other things to think about are:

1. Time Taken for Settling a Claim:

You should inquire about the chosen company's claim settlement time. Even if the insurer has a high ICR, processing the claim might take longer than six months. A situation like that is not ideal.

2. New Insurance Company:

A low denominator will result in a high quotient value because ICR is a ratio. The calculations may show a relatively higher ICR if a new insurance provider in the market has collected fewer premiums in the early years. They may have seen a lot of claims in the early years, so there is nothing to worry about.

3. Different Types of Insurance Products:

Insurance companies offer a variety of products, including health, life, and auto insurance. The average of them will be the overall ICR. So, be aware that the ICR you see might represent just the average for health insurance or the overall average.

Is Incurred Claim Ratio Different from Claim Settlement Ratio (CSR)?

It is necessary to avoid the confusion between claim settlement ratio and incurred claim ratio. These are two distinct but essential terms that are frequently used in the health insurance industry. The total amount of claims paid over the total premium collected over the course of the year is the health insurance companies' incurred claim ratio. The ratio of all claims settled to the total number of claims received by the health insurance company in a given year is known as the claim settlement ratio. To maintain a win-win situation, it is common practice to choose the company with an average ICR but higher CSR.

Conclusion

There is no one-size-fits-all approach to health insurance for consumers. When selecting a health insurance provider, several factors should be taken into account. The ICR is just one of the variables considered when evaluating a company's financial stability. Before selecting the best insurer, you should look into the company's reputation in the industry as well as other aspects to make an informed decision.