Buying A Term Insurance? Don't Ignore the Claims Settlement Ratio

• 15th Dec 2021
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Summary

Term insurance plans are popular with the masses due to their simplicity and cost-effectiveness. However, you must be careful before choosing one. The claims paid ratio is one such factor that you must consider before buying term insurance. Read on to know more about the importance of the claims settlement ratio.

There is a total of 24 IRDAI-approved insurance firms in India. As an insurance buyer, you may have various choices, but choosing the right insurer can be overwhelming, especially if you are a first-time insurance policy buyer. You must consider several factors before making the decision. One such critical fact is the claim settlement ratio of the insurance company.

What is Claim Settlement Ratio?

The Claim Settlement Ratio (CSR) of an insurance company is calculated by dividing the total claims paid in a period by the total claims filed in that period with that company and multiplying the resultant number 100.

 CSR = (Number of claims paid /number of claims filed) X 100

For example, consider an insurance company where 10,000 claims were filed in the year 2020. During the same period, the company settled 9,300 claims. Therefore, the claim settlement ratio of the company for the year 2020 will be calculated as follows:

CSR = (9,300/10,000) x 100 = 93%

It is important to note that the CSR of an insurance company is not derived from the data from any single policy that it offers. Instead, it is derived after taking data from all its policies that are on offer. Every month the Insurance Regulatory and Development Authority of India (IRDAI) releases the CSR of all insurance companies for the customer’s benefit.

Factors to Look for Regarding Claims Settlement Ratio

A term insurance buyer should always look for the following points related to CSR while selecting a suitable insurance firm.

• High CSR

It must be clear by now that a term insurance buyer should always buy insurance from the insurance firm with a high claim settlement ratio. . Ideally, it should be above 95 per cent.

• Consistency

The CSR should be consistently high over a period spanning at least five years. It is normal to have some decent fluctuations in numbers due to reasons beyond the control of management. But the numbers should follow a decent pattern with the growth of the company.

Is Claims Settlement Ratio the Only Factor to Be Considered

As already discussed, the claims settlement ratio is a vital factor when evaluating a company’s credibility. However, refrain from overtly emphasising a high claim settlement ratio alone. The claim settlement ratio depends on the number of claims filed with a firm. 

The size of the company affects the ratio as well. Thus, apart from the claim settlement ratio, you should also consider other factors like the company’s reputation and goodwill. Moreover, consider the company’s credit rating. A company rated AAA shows it is financially strong, maintains a good debt ratio, and can handle claims even in a stressed environment. 

The claims settlement ratio is an essential determinant while choosing term insurance. However, use it flexibly, along with other factors, to compare different products. Take your time. After all, it is not just about ensuring a financial safety net for your family but also about your peace of mind.

- A Consumer Education Initiative series by Kotak Life