IRDA released its annual report for FY2017 in the first week of 2018. We have the claims settlement data for various life insurance companies for 2017-2018.
Clearly, higher the claim settlement ratio, the better it is. However, as I had discussed in my post on claim settlement ratios for FY2016, the claim settlement data hides more than it reveals.
Insurance companies typically focus on Claim settlement by Number of claims received. In my opinion, this may not present the true picture. We also need to consider the claim settlement in terms of benefit amount.
Claims Settlement Ratio by Number of Policies = No. of claims paid/No. of claims received.
Claims Settlement by Benefit Amount = Amount of claims paid/Amount of claims received
Let’s assume an insurance company receives 100 claims.
90 claims of Rs 5 lacs and 10 claims of Rs 50 lacs.
It pays 95 claims, 90 claims of Rs 5 lacs and 5 claims of Rs 50 lacs i.e. it rejects half the high-value claims.
Claim settlement by Number = 95/100 = 95% (This is the number that is highlighted in advertisements)
Claim settlement by Benefit Amount = (90X5 + 5X50)/ (90X5 + 10X50) = 73.6%
Now, if you are planning to purchase a new policy, wouldn’t you consider the second number as one of the inputs? Of course yes.
Let’s look at claim settlement data for FY2017.
Claim Settlement Ratios of Life Insurance Companies for FY2017
You can view this data on pages 141-142 of IRDA Annual Report for FY2017. You can download IRDA Annual Report from IRDA website.
What is evident from these Claim Settlement ratios of life insurance companies for FY2016-2017?
- Claims settlement numbers look ways better than Claims Settlement numbers by Benefit amount.
- It is not surprising to see why the insurers choose to highlight settlement data only by the number of claims (and not in terms of benefit amount).
- It appears that many high-value claims get rejected, perhaps from term insurance plans.
- Just looking at the average claims size, you can assess that bulk of the policies are non-term policies. Otherwise, the average claims size would have been much higher. Not surprising.
- The size of an average rejected claim is way higher than an accepted claim. Again, not surprising. Insurers are likely to do more (better) investigation for high-value claims.
- Moreover, if a person intends to commit fraud, he/she is likely to go for a high-value policy (say a term insurance plan). At the same time, insurance companies may be inclined to reject high-value claims too.
- LIC sits at the top in terms of claim settlement. No doubt about this. However, we must also appreciate that the average claim size of LIC is also the least.
You must understand that, under life insurance (unlike health insurance), the insured event (death of the policyholder) is a very objective event. Therefore, there is not much scope for confusion.
What could have made this data better?
- It would have been better if the average age of the rejected claims (age of the policies for which the claims were rejected) were also released.
- If the average age of the rejected claims is low (say less 1 or 2 years), the reason for rejection could be due to fraudulent activity or material non-disclosure. You can expect (and justifiably so) insurance companies to investigate an early death deeply. There could be a case of adverse selection too. Perhaps, as a prospective buyer, you can live with that.
- However, if the average age of the rejected claims is high, it poses serious question marks over sales, underwriting and claim settlement policies of the life insurance companies. Better to avoid such companies.
- It would have been better if the segregated data was provided for traditional plans, ULIPs and term life insurance plans.
- By the way, the annual premium has data for annual premium collected for linked and non-linked policies. It is difficult to understand why the same report can’t have claims data for different kinds of policies. After all, the insurance companies must be collating such data. Claims data is a critical input to underwriting and pricing the policies.
The quality of data could easily have been much better. The insurance companies already have all the data with them.
It is difficult to understand why IRDA, the insurance regulator, does not insist on releasing data by policy type. Life insurers can be asked to release settlement data for term plans, ULIP and traditional plans separately. Such data will make it easier for prospective buyers to choose insurance companies.
If, not in IRDA annual report, such data can be released on insurer websites.
If you are frustrated too, you don’t have to look for culprit beyond IRDA.
How should use this information about claim settlement data about life insurance companies?
You would want to go with companies that have higher settlement rates both in the number of policies and in terms of benefit amount.
If there is a vast discrepancy between claim settlement ratios by the number of policies and benefit amount for a particular insurer, you need to review the data for previous years too. This discrepancy can happen because of a few outsized claims. However, if the trend has repeated year after year, you need to cautious.
HDFC Standard Life is a case in point.
*The Claim settlement ratio may look better than reported earlier in the post because I have removed the pending claims while calculating the ratio.
There are other insurers too that have a sharp difference between claims data based on number and benefit amount. However, I picked up HDFC Life because it is one of the biggest life insurers.
There is not sufficient evidence to hold HDFC Life guilty. It is possible that a number of customers signing up with HDFC Life are hiding medical information or indulging in fraud. However, it is difficult to digest this.
In my opinion, there is something wrong with the companies that have very low claim settlement ratios by amount. Either they follow unethical sales practices (sales at any cost culture) or their organization culture (processes) is structured to reject claims. Or perhaps both.
It is better to avoid such companies.
Go with companies that have high claim settlement ratios both by number and benefit.
There may be relief for life insurance policyholders under the Insurance Amendment Act
With the amendment (passed in 2015), the life insurance companies cannot reject your claim if your policy is over 3 years old.
This means, once your life insurance policy is 3 years old, the insurance company CAN NOT reject your claim for any reason. The move is extremely customer friendly.
Especially for the policies issued after the passage of the Act, there can be no ambiguity. Therefore, for the new buyers, the claim settlement data becomes relatively less important.
Unless the insurance companies can pull out an act of magic, I see claim settlement ratios for life insurance companies going up in the future.
However, if you are planning to pick up a new term insurance plan (I don’t suggest investing in traditional plans or ULIPs), it is still a better choice to go with a life insurance company with better claim settlement ratios.
For more on this topic, suggest you go through this post.