Why the Claim Settlement Ratio Isn’t the Best Measure for Comparing Term Insurance Plans?

When you buy a term insurance plan or life insurance policy, the insurer agrees to pay the cover amount or death benefit to your nominee in case of your untimely demise. Hence, as a policyholder, it is extremely important to ensure that your insurer settles your claim on time. As you begin to research term insurance plans, you will see many articles claiming that you should take into account the claim settlement ratio when choosing the insurance company. But is this inference correct? What exactly does the claim settlement ratio indicate?

If an insurer has a claim settlement ratio of 99 percent, does this imply that your nominee will receive the claim 99 percent of the time? 

So, what is the claim settlement ratio?

The claim settlement ratio (CSR) is a metric that compares the number of claims paid by an insurance company to the number of claims submitted by nominees or beneficiaries. It is calculated as a percentage and reported each fiscal year.

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For example, if an insurer has a claim settlement ratio of around 98%, it means that the company has settled 98 out of every 100 claims received.

Why doesn’t the claim settlement ratio work?

CSR does not indicate the likelihood of claim settlement: It simply refers to claims that an organization has previously settled. A high claim settlement ratio does not guarantee that your claim will be settled. Similarly, a low ratio does not imply that your claim will not be settled.

Indicates the number of claims, not the value of claims. Secondly, it does not specify the number of claims settled, only the total sum paid. It is seen that certain insurers have a very high claim settlement ratio number but a lower claim settlement ratio in value. As a result, it is probable that the insurer paid multiple low-value claims while rejecting high-value claims. Thus, this ratio will not account for the disparity.

Does not accurately reflect the quality of claim experience: Finally, the claim settlement ratio does not reflect the quality of the claims experience or the time required to resolve claims. What if one company has a ratio of 99 percent but takes an average of 30 days to settle a claim, whilst another insurance company has a ratio of 98.5 percent but an average turnaround time of seven days? Which insurance provides superior claims service in this case? A high-ratio insurer may still be extremely challenging to deal with, with overly complex processes.

How Many Days Will It Take to Resolve the Claim?

The claim settlement ratio might also reveal how long it takes the insurer to resolve a claim on average. For example, if an insurer’s ratio is 95%, it will take around 18 days (on average) to settle the claim. However, the average time raises a number of problems. What is the highest and lowest time? And when does the insurer process claims faster? The Indian insurance regulator, IRDA, has set a maximum time limit for insurers to fulfil a death claim. The regulator states that after all of the documentation is submitted, the insurer must settle the claim within 30 days. This restriction includes the time it takes the insurer to explain and verify the information.

It is an approximated ratio: The declared claim settlement ratio is the total amount paid out by an insurance company for all life insurance policies and other products. What you see is a projected ratio, not the real ratio, for various types of policies ranging from term insurance and endowment coverage to children’s plans, group insurance, money-back policies, online plans, and so on.

It is expressed as a percentage: The claim settlement ratio is presented as a percentage rather than an actual amount. This could be misleading because it does not state how many claims an insurance company has really rejected. For example, an insurance company that dismisses 100 out of 1,000 claims will have a 90% Claim Settlement Ratio. The following year, it may get 10,000 claims but reject 500 of them. Despite the fact that more claims have been rejected, the company’s claim settlement percentage has increased to 95 percent.

So, basically, the claim settlement ratio isn’t a reliable sign of competent insurance.

What can you do? 

The only way to ensure that your nominee does not encounter problems during claims is to be as transparent as you can when filing for the term insurance plans. Fill out the proposal form completely; do not guess answers to questions; and do not take any shortcuts on the assurance of the agent who is in a hurry to issue the policy. 

At your end, make sure you reveal all facts – personal, professional, and health history – in a straightforward manner. You must complete all declarations and ensure that your nominee is informed of the policy. Insurers mostly want health and lifestyle statements, such as smoking, alcohol consumption, and family medical history. For example, if your parents died prematurely, you may be required to reveal the cause of death. 

According to insurers, fraud is the most common cause of claim rejection. Insurance is a contract of absolute good faith. The policy is established based on the information provided by the proposer and thereafter, risk is appraised. If someone suffering from chronic conditions such as cancer or kidney problems purchases a policy without revealing the material facts, resulting in a death claim, and hospital records show that the illness was the cause of death, the claim may be rejected. Section 45 of the amended Insurance Act, which states that your coverage cannot be called into question after three years, is beneficial to policyholders. Prior to three years, fraud and failure to disclose pre-existing illnesses account for the majority of such rejections. Keep track of all communications and share them with your family members.