In an earlier post on claim settlement ratio, I had delved into claims data of health insurance companies for FY2018. In this post, let’s look at the claims settlement ratio for the life insurance companies for FY2018.
Understanding claims settlement data for life insurance companies is relatively easier since the insured event (death of the insured) is quite crisp. There are two prime statistics when it comes to assessing claim settlement of life insurance companies.
#1 Claims settlement by number
A company gets 100 claims. Settles 99 of those claims. Rejects 1 claim. It’s claim settlement ratio is 99%. Impressive, isn’t it? Higher the claim settlement ratio by number, the better it is. However, this number does not present the complete picture.
#2 Claim settlement by amount
A life insurance company gets 100 claims. 95 claims of Rs 2 lacs each and 5 claims of Rs 1 crore each. The insurer settles all the 95 claims of Rs 2 lacs and 4 claims of Rs 1 crore. In terms of the amount, the company received claims of Rs 6.9 crores (95X 2 lacs+ 5X 1 crore) and settled Rs 5.9 crores. In terms of amount, that is a claim settlement of 85.5%.
If you are looking to finalize a life insurer, you would ideally want both the claim settlement ratios to be high. If you see a trend of consistently low claim settlement ratios by amount (for a company), the company is either getting too many fraudulent claims (which is unlikely) or the company is rejecting a number of high-value claims (which is a red flag).
Let’s look at the claim settlement ratios of life insurance company for FY2018. Yes, FY2018 IRDA came out with its annual report for FY2018 in January 2019 and the all the information in this post has been sourced from the IRDA annual report 2018.
Claim Settlement Ratios of Life Insurance Companies
To arrive at the claim settlement ratios by number, I have reduced the number of claims outstanding for less than 3 months at the end of the year from the total claims during the year.
Personally, I would also look at the volumes too. A company that has settled only a few hundred claims over the year and has maintained good settlement ratios may not inspire as much confidence. (as compared to a company that has settled many thousand claims during the year and has maintained good settlement ratios). Additionally, you need to focus on the trend (and not just the data for 1 year).
I have highlighted the companies that have scored over 90% on both the accounts. The ones that have done this with very high volumes have been highlighted with dark green.
Another way to shortlist could be to look at the insurance companies with both the ratios in at least mid-nineties.
Not surprising, the average rejected claim is much higher than the average settled claim. Difficult to read too much into this data.
Points to Note
- A person who wants to indulge in fraud would likely want to purchase a high value term insurance policy. Therefore, you can expect rejections to be higher for high value claims. The problem is that we don’t know the reason for claim rejections. Rejection due to fraud are quite objective. Rejections due to non-disclosure can be subjective.
- The insurance companies also have an incentive to reject high value claims. The level of investigation will be higher for high value claims (term insurance plans) and early claims.
- It would have been better if the data was available based on policy types too (Traditional, ULIPs and term plans).
- It would also have been if we had average age of the rejected claims. It is a red flag if older policies are getting rejected.
The Case of HDFC Life
In my previous posts on claim settlement of life insurance companies (for FY2016 and FY2017), I had highlighted that HDFC Life has a high claim settlement ratio by number but low settlement ratio by amount. The claim settlement ratio by amount was 75.1%, 74.7% and 82.1% for FY2015, FY2016 and FY2017.
For FY2018, the claim settlement ratio by amount is a more respectable 88.63%. Needs to get better.
Disclosure: I have a term insurance plan from HDFC Life.
Relief from Section 45 of the Insurance Act, 2015
As per Section 45 of the Insurance Act, 2015, a life insurance company cannot reject death claim under a policy (under any circumstances) if the policy is over 3 years old.
By the way, there remains a question if the said clause also applies for insurance policies issued before 2015 (passage of the Act). However, for someone who wants to purchase a fresh policy, that is immaterial. Protection under Section 45 is available to any new policy issued.
In a way, that brings down the importance of claim settlement ratios. However, do note that the death may happen within 3 years of purchase (the said Section 45 won’t protect you then). So, claim settlement ratios are not totally irrelevant. Better to go with a company with high settlement ratios.
While purchasing the policy, make all the medical disclosures. Let the insurer decide if the disclosure is material or not. Don’t hide anything. Insurance is a contract. You must keep your end of the bargain.