Claims Settlement Data of Health Insurance Companies (FY2018): How to interpret?

While selecting an insurance plan, the first filter you apply is on the Claims settlement ratios. Lower the claim settlement for a company, the more you are likely to stay away from the company. IRDA came out with its annual report for FY2017-2018 in January 2019. In this post, let’s look at claims data of health insurance companies for FY2017-2018.

Claims Data is presented differently for health and life insurance companies

And there is good reason for this.

In life insurance, the claim settlement is black and white. Your claim is either settled completely or rejected completely. This is because the insured event (death of the policy holder) is very crisp. There is no doubt about the insured event. Either the insured is alive or dead. The rejection can only be on account of fraud or material non-disclosure. Therefore, claim settlement by number or amount gives a good account (if you see data for a few years).

In case of health insurance, that is not the case. The insured event is not very crisp. Moreover, it varies from plan to plan. Therefore, the rejection is not only due to fraud or material non-disclosure. A health insurance claim can be rejected simply because you claimed for what was not covered under the plan You can’t fault insurer for that.

Moreover, your claim will hardly be paid in full. There are some expenses in the hospital bill that will never be settled. The mathematics behind the claim settlement calculation can get very complex.

Let’s say you make a claim of Rs 4 lacs, but the insurer pays only Rs 1.5 lacs. Do you count the claim as honoured or rejected? As a consumer, you may feel short-changed while the insurer will boast about it. Let’s look at a few examples.

1. Your policy has waiting period of 4 years for illness X. You make a claim after 2 years. The insurance company happily (and rightly so) rejects your claim.
2. There is a sublimit of Rs 25,000 for a procedure. You incurred a bill of Rs 70,000 for the procedure. You made a claim of Rs 70,000. The insurer will obviously not pay more than Rs 25,000.
3. Your policy has room-rent sublimit of Rs 5,000 per day. You take admission in a room that costs Rs 10,000 per day. You make a claim of Rs 6 lacs. The insurer pays only Rs 3.5 lacs (due to the difference between room rent and the sublimit). You are angry but the insurance company is right.
4. The customer has two health insurance plans. The first insurer pays up while the second insurer settles only a portion of the remaining claim (based on complex mathematics involved).

I am not saying that health insurance companies never do anything wrong. The insurance clauses are not very objective and are subject to interpretation. You are in trouble if the insurer interpretation Is adverse.

We must understand that the plain vanilla claim settlement by number and amount does not paint the complete picture in case of health insurance companies. I did not find this data in the IRDA annual report either. However, I feel it would have been better if such data was available insurer wise. IRDA report captures the data for the industry (but not insurer wise).

IRDA report provides incurred claims ratio for each health insurance company.

Incurred Claims Ratio= Claims paid during the year/ Premiums collected during the year

Let’s say an insurance company collects health insurance premium of Rs 500 crores during the year and pays Rs 250 crores towards claim settlements. The incurred claims ratio will be 50%.

Claims settlement Data (Incurred Claims Ratio) for Health Insurance Companies for FY2017-2018

As you can see, incurred claims ratio is much higher for public insurers.

The bigger question is, how do we interpret ICR and what is a good ICR? In my opinion, there is no crisp answer. ICR can’t be read in isolation.

What is a good Incurred Claims ratio?

In case of life insurance companies, the higher the claim settlement ratio, the better it is. However, in case of health insurance companies, this is a bit tricky. A very high ICR may not be very good.

Firstly, it is unfair to expect insurance companies to have incurred claims ratio of close to 100%. This is because the payment for insurance claims is not their only expense. They have a business to run. The premiums collected are the only source of revenue (or so I believe) while there are multiple expense heads such as claim payment, employee salaries, office expenses, marketing expenses, taxes, and any other business expenses. If everything goes towards claims settlement, how would the insurance company be viable? You wouldn’t want to be with an insurance company that can’t keep it head above water, would you?

An incurred claims ratio closer to 100% (on a regular basis) can be due to poor underwriting (risk not priced well). There are many examples where group policies have been kept ridiculously cheap. Such insurance portfolios can only bleed. By the way, a very high ICR can also point to a favourable claim settlement culture in the company.

Some of the companies, all public insurers, have incurred claims ratio in excess of 100%. You might feel that such companies are better. However, I am not sure. An insurance company can’t be viable if the incurred claims ratio (or ICR) is more than 100% on a regular basis. As a customer, you can witness sharp hikes in premiums in the coming years or potentially greater arm twisting at the time of claims (especially if you are a retail customer). If you are a group plan customer, the plans that are leaking too much money can even be shelved next year. Group plans don’t come with a promise of lifelong renewability. At the same time, the public insurers are funded by the Government. Therefore, they can live with losses for a very long time.

Is low incurred claims ratio good?

Low ICR can be due to unfavourable claim settlement culture, poor sales practices or mis-selling. However, this may not be the only reason. It could also be due to good underwriting or simply choosing healthier customers.

Let’s say a new insurance company sets up health insurance operations in India. With their strategy of attracting low-risk customers (young and healthy) at very low premiums, they quickly build up good presence in India. Since they have focussed on only healthy customers, they should expect to get a low number of claims in the first few years. This may lead to a lower incurred claims ratio, let’s say 40%. Nothing wrong on the part of the insurer. However, in this case, a low incurred claims ratio means nothing to the prospective buyer (or so I think). It is neither good nor bad. For all you know, as this set of buyers gets older, the insurance company might show its true colour.

If we have better disclosures from the insurance companies (discussed later), we might be able to attach greater meaning to these numbers.

Personally, I will be wary of insurance companies with a very low ICR or very high ICR. For me, a low ICR will be less than 60% and a high ICR will be more than 85-90%. To be honest, not much thought has gone into selecting these thresholds. And yes, don’t just look at the numbers for one year. Focus on the trend.

How the claims data can be made better?

As I understand, product wise date Claim settlement data (incurred claims ratio) is not made available to the customers. If not in the IRDA annual report, this information should at least be made available on the insurer website.

It would help if the insurers could provide age wise data for each product i.e. Product X has certain percentage of customers are in the age bracket of 25-35, 35-45 and so on and claims data for each category. If the most customers are young, then a low ICR is expected.

The insurance companies should disclose incurred claims ratio for various types of customers i.e. retail and group plans. It is widely known that group insurance plans have better claim settlement than retail plans. It is possible the corporate buyers with a higher negotiation power are benefitting at the expense of retail customers. Lower premiums or better claim settlement or both. As a prospective buyer, you would want to know if the company is retail customer friendly.

The IRDA annual report (2017-2018) provides the aggregate industry level data. This does not paint a rosy picture. The ICR for retail customers is only going down.

Even the raw data in terms of number of claims made and rejected will help quite a bit. I do understand “approved: and “rejected” is quite subjective with health insurance. However, there could still be segregation in terms of percentage of claim amount paid. For instance, we could have 5 ranges (product wise).

25% of the claims: Claim rejected outright

10% of the claims: Settled between 0 and 25% of the claim amount

5% of the claims: Settled between 25% and 50% of the claim amount

15% of the claims: Settled between 50% and 75% of the claim amount

45% of the claims: Settled between 75% and 100% of the claim amount

The aging data of the claims (how long it took to settle a claim) can also be useful. The IRDA report provides the data for the entire health insurance industry. Company wise data would help. Even important will be the age of the policy (where the claim was outrightly rejected). If a claim is outrightly rejected for a 10-year-old policy, we have a serious problem. Do note health insurance plans do not enjoy the same benefit as life insurance policies. A claim under a life insurance policy cannot be rejected if the policy is more than 3 years old. No such relief for a health insurance company.

What else do you think would help?

Disclosure: My health insurance plan comes from an insurer with less than 60% ICR.