Why check Incurred Claim Ratio before buying insurance?

Henil Shah
/ Categories: Mutual Fund, MF Unlocked
Why check Incurred Claim Ratio before buying insurance?

There is very low penetration in insurance with the intent to specifically manage risk, rather most people buy insurance as an investment product. So, there is always a dilemma as to how to select an insurance policy to cover risk. Many just go with what their insurance advisor tells them. However, it is always prudent to do a self-research before buying insurance. There are various parameters such as, claim settlement ratios, premium, features, exclusions and capping which should be considered before buying insurance. One such parameter is incurred claim ratio.

Incurred claim ratio (ICR) simply measures the amount collected as a premium by the insurance company as against the total claim amount settled during the period, usually one year. If the ICR is more than 100 per cent, then it means that the total claim amount settled is more than the amount that the insurance company collected as premium. That said, the company will find it difficult to sustain and may either start rejecting some claims or increase the premium to manage claims better or may also altogether change their product’s fundamental attributes.

If the ICR is between 50 per cent and 100 per cent, it means that the insurance company has collected more amount as premium than the total claim amount settled. Here, the insurance company is making profits. This means that the insurance company has succeeded in developing a quality product and helping policyholders to understand when and in which situations they must make a claim.

If the ICR is less than 50 per cent, it means that the insurance company collected the amount as premium and is hardly giving out claims or is charging a huge premium as it is making relatively large profits. However, the insurance company generating huge profits is not necessarily a good sign. If there are few claims, then the policyholder starts realizing over a period of time that the insurance policy that he is currently holding is costly and the exclusions in the policy are more as compared to other products in the market. Insurance companies should develop products that actually help settle claims within the correct limits. ICR anywhere between 75 per cent to 90 per cent is ideal.

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