Health Insurance

Should You Choose Your Insurer on The Basis of the Claim Settlement Ratio?

Should You Choose Your Insurer on The Basis of the Claim Settlement Ratio?

When buying a health insurance plan, you may have a lingering doubt about whether the insurance company will actually honour your claim settlement request.

One of the most popular metrics promoted by insurance companies to dismay these fears is the claim settlement ratio. You would also have been recommended to check an insurance company’s claim settle ratio before investing your money in a plan.

What is a claim settlement ratio? How does it work? And does it really stand as a true test of an insurance company’s performance and expected service?

Let’s explore
 

Claim Settlement Ratio

A claim settlement ratio is calculated as the number of claims settled by the insurer divided by the number of claims received in a particular financial year.

Claim Settlement Ratio = Number of claims settled/Number of claims received

For instance, if Insurer A has a claim settlement ratio of 97%, it means the insurer paid 97 out of 100 claims. The remaining three claims were rejected or pending.
 

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Limitations Of The Claim Settlement Ratio

While a claim settlement ratio may seem to be a good filter to judge an insurance company’s service, it doesn’t give you the complete picture. It has its own drawbacks.

  • No Segregation Between Valid And Invalid Claims

    A claim settlement ratio does not indicate how many valid claims were filed and how many were settled by the insurer.

    If an insurer fails to identify invalid claims and settle every claim that comes their way, they may be left with little or no money for genuine claimants. Hence, insurers must be able to distinguish between valid and invalid ones, if they want to remain financially viable in the long run. Sometimes, even good insurers might have a poor claim settlement ratio if they encounter a lot of fraudulent claims in a year.

ExampleIn the following table, we will look at two insurers, their claims received, and their claims settled -

Insurance company Total Claims Valid Claims Invalid Claims Valid Claims Settled Invalid Claims Settled Total Claims Settled Claim Settlement Ratio
Insurance company A 100 94 6 94 0 94 94%
Insurance company B 100 90 10 90 5 95 95%

Here

Insurance Company A Insurance Company B
The insurer gets 100 claims a year. Out of these, only 94 are valid claims and the remaining 6 are invalid cases. In this case, the insurer settles 94 of the 100 claims resulting in a 94% settlement ratio. Here, the insurer receives 100 claims in a year. Among these, they detect ten fraudulent claims. However, they still settle 5 fraudulent claims out of 10, and 90 valid claims. Their claim settlement ratio is 95% .

They both seem to have a good claim settlement ratio! How do you choose between these two options?

Insurance company A

They rejected invalid claims and paid off only valid claims.

Insurance company B

They are definitely not doing the right thing by paying off invalid/fraudulent claims. This clearly indicates that they may not remain financially viable for a long time. As a result, the insurance company may become underfunded by the time your family raises a claim and won't be able to settle it.

This example shows that 'high claim settlement ratios' can be deceptive and don't necessarily reflect the quality of an insurance company.

  • No Information About The Claims Experience

    A claim settlement ratio does not include any information about the claims experience. There are several aspects that influence the claims experience -

  1. The average processing time for valid or approved claims. You may have heard of people receiving claim amounts after 1-2 years, or even more. Why is there such a delay? When you file a claim within a few years of policy purchase, the insurers will diligently check whether your claim is genuine and so, this approval process takes time. Such long waiting periods may cause a financial blow to the claimant, especially if their lifestyles are dependent on the amount.
  2. How smooth the claims process is when it comes to form length, documentation, etc.
  3. The quality of customer service when you contact the call centre. Are your complaints/queries heard and resolved efficiently and effectively?
  4. Infrastructure for digital claim filing.

Analysing these factors will help you understand how seamless your claim journey will be. But, the claim settlement ratio doesn't provide answers to any of these questions.

  • Does Not Reflect On Denial Of High Value Claims

    Say an insurer receives 95 claims of Rs 5 lakhs each in a year, and five claims of Rs 1 crore each.

    The insurer settles all smaller claims and pays 95 x 5 lakh = 4.75 crores. However, the five large claims, totaling 5 crores, were rejected.

    The Claim Settlement Ratio = 95/100 = 95%

    Though the company showcases a whopping 95% claim settlement ratio, it is quite evident that they have settled only the small amount claims and rejected the large ones. Now, imagine one of those 1 crore claims being yours!

    Let's take a closer look at how much they've settled out of what was claimed -

    Here, the Claim Value Settlement Ratio = 4.75 Crores / (5+4.75 Crores)

    = 4.75 Crores/9.75 Crores

    = 48.7%

    By looking at this number, it is quite evident that the claim settlement ratio alone cannot tell you how much money has been paid out.

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Summing Up!

“All that glitters is not gold” holds true when it comes to the claim settlement ratio. An insurance company with a high claim settlement ratio is not necessarily the ideal one, nor is one with a low claim settlement ratio unreliable. Ensure you choose the right policy based on your needs and not based on the glitzy CSR number flashed on the websites.