Six simple ratios to check before buying any insurance policy

Representative image

When most people buy insurance, they compare premiums, riders and bonuses and then sign on the dotted line. What they rarely check is the strength and behaviour of the insurer itself. That part is buried in IRDAI disclosures and annual reports, but it matters just as much as the brochure. A handful of key ratios can tell you whether a company pays claims on time, is financially sound and sells policies that customers actually keep.

Claim settlement ratio

This is the starting point for any comparison. It shows what percentage of claims the insurer has paid in a given year. The higher this number, the more likely your family’s claim will be honoured without drama. For life insurance, anything upwards of roughly 95 per cent is generally reassuring, but do not look at just one year. For health and general insurance, track the pattern over at least three to five years rather than chasing one impressive figure.

Claim repudiation and pending ratios

Repudiation is the polite word for “rejected claims”. If this ratio is high, it could mean very strict documentation demands, confusing exclusions or weak hand-holding at the claims stage. The pending ratio shows how many claims are still under process. A large backlog hints at slow systems, understaffing or disputes that drag on. Together, these two ratios give you a feel for how painful (or smooth) the claims journey is likely to be.

Solvency ratio

Solvency is about survival. IRDAI requires every insurer to maintain a minimum solvency ratio of 1.5, which means it must have assets at least one and a half times its liabilities. A company that only hugs the minimum buffer may be more vulnerable to shocks. A comfortably higher solvency ratio suggests stronger reserves and a better ability to honour long-term promises, which is crucial for life policies that can run for 20 or 30 years.

Incurred claim ratio

This compares total claims paid with total premiums collected. For health and general insurance, an incurred claim ratio roughly in the 70 to 90 per cent band usually means a workable balance: enough claims being paid, but not at the cost of the company’s survival. If the ratio is very low year after year, it can hint at aggressive pricing or tight claims practices. If it is extremely high for several years, it may point to stress in the business.

Combined ratio

This is used mainly in non-life insurance. It adds claim payouts and management expenses and then divides that by total premium income. A combined ratio below 100 per cent means the insurer is running its core underwriting operations in profit and managing risk sensibly. A ratio above 100 per cent, if sustained, suggests that claims and costs together are higher than premiums and the company is relying on investment income to plug the gap.

Persistency ratio

Persistency tells you how many customers continue paying premiums instead of letting policies lapse. For life insurance, the 13th month and 61st month persistency ratios are especially important. Strong numbers here usually mean that policies are well explained, reasonably priced and fit customers’ needs. Weak persistency is often a red flag for hard selling, unrealistic projections or products that stop making sense once the tax benefit novelty wears off.

FAQs

What ratios should I focus on for health insurance?

For a health policy, give most weight to the claim settlement ratio, incurred claim ratio and solvency ratio, and see how they have moved over a few years.

Is a very high incurred claim ratio always bad?

Not automatically. A spike for one year can be due to events like a pandemic. But if the ratio stays very high over several years, it can signal pressure on the insurer’s finances.

Do these ratios apply to online-only insurers as well?

Yes. Every insurer regulated by IRDAI, whether digital-first or traditional, has to publish these ratios regularly. You can usually find them on the company’s website or in IRDAI’s public disclosures.