One of the first questions that many have on their minds while short-listing a life insurance policy is whether insurance company will pay up if the policy holder dies.
The greatest worry is if, after so many years of paying premium, the insurance company will reject the claim and leave your family high and dry in times of such emotional stress.
No surprise many trust purchasing term plans from LIC despite those plans being doubly as expensive. That’s because people trust LIC.
Claim Settlement Data from various insurance companies gives an indication about how good an insurer is at settling claims.
Higher the claim settlement ratio, the better it is.
But even this data can be misleading.
What is typically reported on insurance websites and in newspapers is the settlement ratio is the settlement in terms of number of claims. What is not typically reported is the ratio in terms of amount of claims settled.
And replying solely on claim settlement ratios based on number of claims can be misleading.
Let’s see why.
Why is this important?
Suppose an insurance company gets 100 claim applications during the year.
10 claims are from High Sum Assured Term Insurance plans with say an average claim of Rs 1 crore.
90 claims are from low Sum Assured traditional life Insurance plans with say an average claim size of Rs 5 lacs.
Insurance company accepts all the claims from traditional policies while reject 5 claims from Term Insurance plans.
Total Claims = 100
Total Claims settled = 95
Claim Settlement Ratio = 95%
95% looks decent. Of course, higher is better.
A claim settlement ratio of 95% gives the insurance company bragging rights.
But this number hides more than it reveals.
The insurer received claim applications for Rs. 14.5 crores (10×1 crore + 90×5 lacs).
But the insurance company settled only worth Rs 9.5 crores (5×1 crore + 90×5 lacs).
That is the settlement ratio of 66.5% ( in terms of amount)
If the company is rejecting high value (high Sum Assured) policies, it will show up in settlement ratios only if the settlement ratios are calculated in terms of amount.
Claims Settlement Ratios for Life Insurance Companies (FY2015-2016)
I calculated the claim settlement ratios based on claims data available in IRDA Annual report for FY 2015-2016. You can download the report from IRDA website.
I have calculated settlement data based on both number of claims and amount of claims settled.
What does it tell you?
- LIC has the highest claim settlement ratio (both in terms of number of claims and amount of claims settled). At the same time, its average claim size is also quite low. That means a good portion of claims are in traditional plans. LIC launched a high value term plan only recently. We need to see if claim experience for term plans is different.
- Average size of rejected claims is much higher than average accepted claim size for almost all insurers.
- Claim settlement percentage (based on numbers) is much higher than percentage based on claim amounts. Now we know why only data based on number of claim is reported.
- The difference for some of the private insurers is way too high. Clearly, something is not right. I believe a disproportionately large number of claims from term life insurance plans (or other high value policies) have been rejected.
Points to Note
- This is for a specific year (FY2015-2016). These numbers may keep on changing for various years.
- You can expect insurance companies to do more due diligence for high value claims. That could be one of reason of higher average values for rejected claims.
- This could also be result of poor sales practices or poor underwriting by insurance companies.
- I am sure there are quite a few people who want to defraud life insurance companies. There will be a few who will deliberately hide material medical information at the time of purchase. Then, there is always a case of adverse selection. However, this data is not useless.
In Life Insurance, insured event is quite objective
In life insurance, the insured event i.e. death of the policyholder is quite crisp. Insurance company can’t argue if the policy holder died or not. The only reason behind rejection of claim can be fraud or non-disclosure of material information by the policy holder at the purchase.
Personally, I wouldn’t purchase life insurance from a company that settles less than 90% of the claims (in terms of numbers) and 80% (in terms of amount). Just a hunch.
Fortunately, an amendment in the Insurance Act in 2014 reduces the importance of claim settlement information while selecting a life insurance policy. This is discussed later in the post.
Curious Case of HDFC Standard Life
For FY2016-2016, HDFC Standard Life has a claim settlement ratio of 95%. However, in terms of amount of claims settled, the ratio is only 69%.
This is atrocious.
Some of the claims are pending at the end of the year. I have considered those claims as rejected to arrive at the percentage.
However, even if I were to remove the pending claims data, the percentage only marginally improves to 74%.
Clearly, the company has rejected quite a few high value claims (perhaps from term plans) while it happily settled claims from low value policies (say, traditional plans).
To dig a bit deeper, I considered for FY2014 and FY2015 too.
*to give benefit of doubt to the insurance company, I have not considered data for cases pending at the end of the year.
The situation is quite bad for FY2015 too. Clearly, high value claims were rejected in FY2015 too.
Should you purchase life cover from HDFC Life?
To be honest, it is not right to jump on to conclusion in absence of greater detailed information. Perhaps, there is an honest explanation. Only the insurance company can provide this.
However, it is difficult to believe that HDFC Life is the target company for all the fraudsters.
I wouldn’t give clean chit to HDFC Life either. Perhaps, there is something wrong.
Again, amendment in Section 45 of Insurance Act (discussed later) will offer some relief.
Why do Insurance Companies not disclose this information? Why is IRDA silent?
It is not difficult for the insurance company to report product-wise or even policy-wise data.
Will help prospective buyers in making a decision.
But the companies never do it.
We know the answer. They have something to hide.
I am at loss to understand why the insurance regulator does not force insurance companies to disclose claim settlement data for each product.
Section 45 of Insurance Amendment Act, 2015 offers relief
Since the insurance regulator was unwilling to act, I guess the Government had to do something to offer relief to policyholders and have trust in insurance industry in general (and not just in LIC).
As per the Act, if your life insurance policy is 3 years old, your life insurance claim cannot be rejected for any reason whatsoever. This means insurance company has 3 years from the date of purchase to prove wrong-doing by the policyholder.
The amendment is effective December 26, 2014. Therefore, it applies to all the policies sold after on or after December 26, 2014. I am not sure if this clause applies retrospectively i.e. for the policies sold before December 26, 2014.
One thing it does is that it reduces options for the life insurance companies. As I understand, life insurance companies don’t mind stooping to new lows to reject claim applications. With the deadline of 3 years, their hands are tied (or so I believe). They have to honor claim for a policy issued over 3 years back.
I believe that reduces the importance of claim settlement ratios while selecting a life insurance policy. However, it does not mean claim settlement information is not important. No one knows when he/she is going to die. What if death happens within 3 years of purchase?
You can read more about this Amendment in this post.
Disclosure: I have a life insurance plan from HDFC Life. Purchased it many years back.
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