Term Insurance

Term Insurance Claim Settlement Ratio: Why It Matters

Upstox Desk thumbnail
By Upstox Desk

6 min read | Updated on January 08, 2025, 10:20 IST

Twitter Page
Linkedin Page
Whatsapp Page

SUMMARY

Rajesh Sharma, a farsighted man, secured his family’s future with a ₹1.5 crore term insurance plan, covering his parents, wife Meera, and children Arjun and Priya. Tragically, after Rajesh’s sudden death, the insurer rejected Meera’s claim, citing undisclosed medical history. This left the family in financial distress, forcing Arjun to pause his education. Meera and Arjun discovered the insurer’s pattern of denying claims, highlighting Rajesh’s oversight in verifying the company’s reputation.

The situation raises an important question: was the blame solely on the company’s unethical practices, or did Rajesh share responsibility for not thoroughly vetting the company before buying the policy?

On whom does the onus lie?

Even though insurance companies are bound by law to deal with their clients fairly, several families like Rajesh and Meera suffer due to the unethical practices of a few companies. This puts the onus of conducting good research about the company and its reputation on the customers. The best way to do this is by evaluating its Claim Settlement Ratio (CSR) before buying term insurance.

But what exactly is a CSR, and how can it be deemed part of due diligence before buying a term insurance plan? Let us find out:

Is CSR the ultimate litmus test for insurers?

In simple terms, CSR is the ratio of the total claims an insurance company settles against the total claims made. So, why is it called the litmus test of an insurance company? Well, because it lets you know how interested and efficient a company is in actually paying you your assured sum. The rule here is simple: the higher the ratio, the more reliable a company is.

How to Calculate the Claim Settlement Ratio?

Before diving into the CSR calculation, let's understand what happens to unsettled claims. While the obvious is that they get rejected, that is only partially true. A major proportion of the unsettled claims get rejected; however, some remain under process at the end of a year.

It generally happens when there is a technical issue in settling the claim, or because it was submitted late during the year. These cases are carried over to the next year.

Now, let's calculate the claim settlement ratio:

*CSR= (Total claims settled / Total claims to be processed )100
Where total claims to be processed:
Claims received during the year + Claims outstanding at the beginning of the year
Working Example:
Let's break it down into numbers to understand it better. An insurance company has the following data for a financial year:
  • Total claims received during the year: 1,000
  • Claims outstanding at the beginning of the year: 32
  • Total claims settled during the year: 985
  • Claims unsettled at the end of the year: 20
  • Claims rejected during the year: 27
So, the total claims to be processed for the year will be:
  • Claims received + Claims outstanding at the beginning
  • 1,000+32=1,032
CSR = (Total claims settled/Total claims to process)×100
  • (985/1,032)×100
  • 95.4%
Claims unsettled percentage = (Claims unsettled/Total claims to process)×100
  • (20/1,032)×100
  • 1.94%
Claims rejected percentage = (Claims rejected /Total claims to process)×100
  • (27/1,032)×100
  • 2.6%

It gives the insurance company a Claim Settlement Ratio of 95.4%, showing strong claim resolution with a small percentage of unsettled and rejected claims.

Why do you need the umbrella of term insurance?

Policyholders consider a term insurance policy an umbrella that protects their families against heavy rains. Financial security of family members is the primary goal of getting a term insurance policy.

What good would it be if after the policyholder dies, their family has not only the grief to deal with but is also deprived of the financial security they must have been relying on?

Therefore, it is crucial to investigate the insurance company thoroughly, not just the policy itself. Before purchasing a policy, research the company, its general financial standing, and its CSR for several consecutive years. The aim is to find any hidden red flags that make it difficult to claim the assured sum.

Are there any red flags to look for in an insurance company?

While it is important not to be paranoid, it is equally crucial to be vigilant and not ignore any red flags that might come across regarding the company and its claim dispersal process. Here are certain practices that are generally not a good sign:

  • The first and most obvious red flag is a low CSR. According to Indian market standards, anything below 90% is considered low CSR and should be avoided.
  • Another thing to look out for is the consistency of the CSR across the years. As a standard practice, checking the CSR of at least five previous consecutive years is advisable. An inconsistent pattern, even above 90, is not a good sign.

For instance, company one's CSR percentages over five years were 92, 88, 91, 87, and 89, while company two maintained a CSR percentage above 90 with figures like 90, 95, 91, 97, and 92. While company one is not reliably prima facie, as its CSR dips below 90 at times, the sharp fluctuations in company two's CSR also indicate instability.
  • It is also crucial to properly understand the company's claim rejection policies. Generally, when buying the policy, the company and the policyholder agree. However, policyholders tend to overlook these policies or do not ask questions. Companies later use this to their advantage by rejecting policies on petty grounds.

Conclusion

Claim Settlement Ratio (CSR) is the litmus test of an insurance company's performance and reliability. It gives you a sneak peek into the company's claim settlement behaviour, giving you a rough estimate of how likely you will get your claim. Because the last thing anyone wants to do is get swamped by insurance-related paperwork and formalities, which ultimately result in claims-related disputes.

While finalising your term insurance, it is important to do your research. You should look for case studies and media reports related to your prospective insurer if it has rejected claims, the reasons thereof, and the role of the regulator in such cases.

FAQs

What is a decent Claim Settlement Ratio?

A decent Claim Settlement Ratio is considered 90% or above, reflecting a company's reliability in settling claims efficiently.

How can you find out a company's Claim Settlement Ratio?

You can check a company's Claim Settlement Ratio on its official website or through the Insurance Regulatory and Development Authority of India (IRDAI) annual reports on its portal.

How often do insurance companies calculate their Claim Settlement Ratio?

Insurance companies calculate and publish their Claim Settlement Ratio annually, based on the total claims settled against claims received and pending.

About The Author

Upstox Desk thumbnail
Upstox Desk is a team of expert writers dedicated to providing insightful and comprehensive coverage on stock markets, economic trends, commodities, business developments, and personal finance. With a passion for delivering valuable information, the team strives to keep readers informed about the latest trends and developments in the financial world.

Next Article