Why is Claims Settlement Ratio Important When Choosing a Life Insurance Company?

Life insurance acts as an essential financial safety blanket, offering long-term security to policyholders and their family members (read nominees). However, when you are buying a life insurance plan, the efficacy of the claim settlement becomes crucial. That’s when the concept of Claims Settlement Ratio comes into play.

Claims Settlement Ratio, also known as Claims Paid Ratio, of a life insurance company is a vital metric that reflects the reliability of a company in honouring claims made by policyholders or their beneficiaries. This is a direct representation of the number of claims paid by the insurer against the number of claims made by the policyholder/nominees, in a financial year. This ratio holds considerable importance as it provides insights into the policy insurer’s trustworthiness, transparency, credibility and overall customer-centric approach.

How is Claims Settlement Ratio Calculated?

Computing the Claims Settlement Ratio follows a straightforward method. It includes dividing the overall number of claims paid by the insurer during a specific period by the overall number of policy claims received within the same time period. For simplification, let’s take an example:

A life insurance company receives 2000 claims in a financial year and it pays/settles 1988 of these claims. Now to get the Claims Settlement Ratio of this insurance company, we simply divide the claims paid (1988) by the claims received (2000) to get the claims paid ratio. Therefore, the Claims Settlement Ratio of this particular life insurance company comes out to be (1988/2000) % or simply put, 99.4%, in that financial year.

A higher Claims Settlement Ratio is indicative of an insurer’s robust performance in meeting its claim obligations to policyholders.

Claims Settlement Ratio of Top Life Insurance Companies in FY 2023*

The below-mentioned table shows the claims settlement ratio for individual death claims of the top life insurance companies in India, in descending order:

How to Analyse Claims Settlement Ratio of a Life Insurance Company?

When assessing an insurer’s Claims Settlement Ratio, there are various factors to be considered. Out of the many, the top three crucial factors include -

1.       Past 5 years’ ratio

Assessing the Claims Settlement Ratio trend over the past five years provides insights into the insurer’s consistency in honouring claims. A constantly improving Claims Settlement Ratio shows the insurer’s commitment to enhancing its services and building trust among customers. It is even a sign that the insurer is focused on offering the best possible support to policyholders, which is exactly what as a customer you want and need from the insurer.

2.       Must be close to 100%

A higher Claims Settlement Ratio (near to 100%) shows the insurance company’s efficiency in settling claims, thus ensuring policyholders’ confidence. This level of efficiency reassures you as a policyholder that the insurer is skilled at quickly processing and honouring rightful claims. This ensures that one’s family will have the financial protection, without having to worry about funds during challenging times like death of loved ones.

3.      Accountability and transparency

Try opening the website of any life insurance company. An insurer with a good and transparent system and high Claims Settlement Ratio will always showcase its claims settlement ratio.  It shows the insurer’s commitment and serves as a proof of its trustworthiness in the event of a financial crisis. These figures are usually given in the company’s website along with other details like the company’s total Assets under Management, Solvency Ratio, Value of New Business, etc.

One can also refer to IRDAI’s annual report published on its website for Claims Settlement Ratio of all life insurers.

Lastly, be crystal clear at your end. Do not hide any medical history or financial history, just to get a good quote. In case of suppression of medical facts/incorrect disclosure, the claims made by you or your nominee will get rejected and these statistics would not help.