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What is Incurred Claims Ratio in Health Insurance and how does it work?

What is Incurred Claims Ratio in Health Insurance and how does it work

Insurance Regulatory and Development Authority of India (IRDA) publish Incurred Claims Ratio of health insurance companies every year. Incurred Claim Ratio refers to net claims paid by the insurance company as against the net health insurance premiums received. If you are planning to take a health insurance policy, one of the key parameters to check is the Incurred Claim Ratio. What is incurred Claim Ratio? How does Incurred Claim Ratio work exactly?

What is Incurred Claim Ratio?

Incurred Claim Ratio (ICR) is the ratio of net claims paid against the net premiums received by the company. This indicates the quantum of the amount paid over the amounts received by the insurance company.

How does Incurred Claim Ratio work?

Let us explain with an example.

X Health Insurance Company Limited has received premiums of Rs 100 Crores for the financial year 2020-21. It has paid Rs 80 Crores by way of claims from its customer for the same financial year. In this case the incurred settlement ratio is computed as follows:

Incurred Claim Ratio (ICR) = Claims paid / Total premiums received x 100 = Rs 80 Crores / 100 Crores x 100 = 80%

Why it is important to understand Incurred Claim Ratio?

This ratio indicates the ability of the health insurance company to make payments towards the claims received from customers.

ICR more than 100%  – Company is paying more amount of claims compared to net premiums received by them. Company might find difficult to sustain. Due to this it can either start rejecting some other claims or increase the health insurance premium or re-jig the products what it is offering. This is not a good sign.

ICR – 60% to 90% – This means that company was able to honor the claims and also collected more net premiums compared to claims. In this case company is making some profits + offer quality health insurance product.

ICR < 60% – This means, the company is hardly settling the claims and enjoying majority amounts as profits.  One should check if they can void such companies.

What is the ideal Incurred Claim Ratio?

While there are no ground rules for this, an ideal incurred ratio can be 70% to 80%. Means company should be able to pay off 70% to 80% by way of claims and retain 20% to 30% as profits.

Limiting factors of Incurred Claim Ratio

Claims Ratio of health insurance companies can sometimes be misleading. Below are some limitations of claim ratio.

1) New Companies / Start-ups in the initial phase of business: If any new company or start-up have started new health insurance products, in initial years, the claims might be very high (over 100%).  Once they settle down, the incurred ratio also might get stabilized.

2) Time taken for claims:  Incurred ratio is for a financial year. Assume there are claims made, however, paid only after the financial period is over, then ICR might be misleading. It would have shown good ICR of 80% to 90%, but in reality, it would have crossed more than that.

Incurred Claim Ratio and Claim Settlement Ratio – Is there any difference?

Generally, many people confuse between these terminologies. Both are different.

Incurred Claims Ratio (ICR) is claims paid over net premiums received.

Claim Settlement Ratio (CSR) is the count of total claims settled Vs. total claims received. E.g. If the insurance company has received 100 claims, it paid 90 and rejected 10. In this case it is 90/100 = 90% claim settlement Ratio (CSR).

While ICR is used for health insurance companies, CSR is used for life insurance companies.

Should you consider Incurred Claim Ratio while choosing health insurance?

If you are planning to choose a health insurance plan, one of the criteria could be incurred claim ratio. High incurred ratio company might find difficult to sustain. A Low claim ratio company might be keeping all premiums as their profits. One can consider a health insurance company that has incurred ratio of say 70% to 80%.

However, ICR can’t be the sole criteria. Beyond ICR, there are several other parameters like health insurance policy features, network hospital coverage, premium etc., which also needs to be considered.

One can compare various health insurance plans, its features, network hospital coverage, ICR and the premium it would cost for individual plan / family floater plan and finally opt a good health insurance plan suitable for them.

Suresh KP

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