When it comes to choosing the correct insurance policy, several metrics play a very important role in guiding individuals to make the right decisions. Among them, two of the most frequently used parameters are the Claim Settlement Ratio (CSR) and the Incurred Claim Ratio (ICR). Though both metrics offer insight into an insurer’s performance, they have different purposes and are often misconstrued.
Claim Settlement Ratio Definition
The Claim Settlement Ratio is a percentage measure given to indicate the efficiency of an insurance company in settling claims made by policyholders. It can be calculated as follows:
Claim Settlement Ratio = (Number of Claims Settled / Total Number of Claims Received) × 100
For example, if an insurer received 1,000 claims in a year and settled 950 of them, its CSR would come to 95%.
Why is CSR Important?
- Trust Indicator: High CSR means that the insurer has a good record of paying claims, and it is a safe bet for policyholders.
- Consumer Confidence: The policyholder is likely to be assured of his or her claims’ processing and settlement without stringent obstacles.
- Comparison Tool: CSR forms a yardstick for comparing different insurers, especially while selecting life or health insurance.
Once more, there’s a catch-and one should always read between the lines of headline numbers. Let us assume that one company rejects the claim based on incomplete documentation and non-disclosure by the policyholder. This can be escaped if one only reads what has been in print and follows all the terms included in the contract of a particular policy.
Understanding Incurred Claim Ratio (ICR)
The Incurred Claim Ratio is the ratio of the total amount an insurer has paid for claims to that of the collected premiums. In other words ,it is calculated below:
Incurred Claim Ratio= (Claims Paid / Premiums Collected) × 100
For Example, if ₹100 crores had been collected from the premium an insurer paid and ₹80 crores were the claims paid in that case then ICR stands at 80%.
Why is ICR important?
Financial Health Indicator: ICR provides an indication about whether the insurance company is managing its funds appropriately or not. Very high ICR-more than 100 percent-might mean that an insurance company pays out more money than it takes, which will have a potential detrimental effect in the long term on sustainability.
Profitability Insights: Extremely low ICR may indicate that the insurance company collects high premium but pays lesser claims, thus indicating a probable inefficiency in claim processing or policy terms.
Regulatory Compliance: Regulatory bodies generally monitor ICR to ensure that insurers balance profitability with policyholder benefits.
Whereas CSR is interested in the quantity, ICR is interested in the value in money, which gives a much fuller view of the operational dynamics of the insurer.
Main Differences Between CSR and ICR
- Definition and Purpose
- CSR: Deals with the number of claims settled as against the number of claims received. It is an index of the claim settlement efficiency of the insurer.
- ICR: It reflects the company’s financial health and whether it can carry on its business.
- Basis of Calculation
- CSR: Claims frequency
- ICR: Claim paid amounts and premium received
- Intended Users
- CSR: Very useful to the policyholder in determining whether the insurance company is reliable, as well as for the expeditious payment of claims
- ICR: Useful for regulatory authorities, investors, and sector analysts in reviewing the financial viability of an insurance company.
- Explanation
- CSR: Generally speaking, the more the merrier, so to speak; the higher, the more likely that claims payouts will happen.
- ICR: Both extremes should provoke warning and need to be pressed further.
Use of CSR and ICR Combining
While analyzing a service provider based on its insurance, for example, with term life insurance, neither of the ratings CSR nor ICR is taken in isolation. More or less both together yield a holistic perception of a company.
- High CSR + Balanced ICR (70–80%): It shows that an insurer typically pays a large number of claims and then subsequently manages its funds prudently. It is the ideal scenario.
- High CSR + Very High ICR (>100%): It shows that the insurer pays claims very efficiently but may face a strain in funds in the long term.
- Low CSR + Low ICR: Red flags both on the front ends; it does not settle claims well and may have restrictive policy terms.
Using such metrics, one may use term insurance calculator further to review suitability and affordability.
Helpful information for policyholders
- Read Beyond Numbers: CSR and ICR can be helpful, but there is more to the story. Check their reasons for rejecting claims, exclusions and customer reviews.
- Leveling the online tools: One must use a term insurance calculator to compare the premiums and benefits among the various insurers. This gets the policy in line with your financial goals.
- Look for Consistency: Check the trends in CSR and ICR over 3-5 years, and not based on a single year’s data.
- Consider the Fit of the Policy: The best CSR insurer isn’t a great choice if the policy doesn’t meet your needs or budget.
New Horizons: New Trends in CSR and ICR
The insurance industry has seen tremendous changes in the last few years due to technology and regulatory changes:
- Digital Transformation: Use of AI-based tools in claims settlement can ensure that most of the CSR can be optimized.
- Product Innovation: Tailored policies, perhaps towards diseases or demographics, have impacts on CSR and ICR metrics.
- Regulatory Oversight: Strict regulations guarantee a better disclosure practice that ensures the overall CSR and ICR also become more transparent.
- Consumer Awareness: It increases consumer awareness of the said metrics, CSR and ICR, to make informed decisions.
Conclusion
An understanding of the Claim Settlement Ratio and Incurred Claim Ratio is imperative while purchasing any type of insurance. While CSR has helped in establishing a measure that gauges an insurer’s capability in settling a claim, the ICR speaks volumes about his financial health. The two provide an all-inclusive view of an insurer.
A term insurance calculator will help you compare policies, premiums, and benefits. And, as you know, the right insurance policy is all about the needs that fit best with your unique financial goals, not the numbers. So, being informed and proactive will help you choose an insurance provider who will protect your interests and deliver value when it matters the most.
