Calculating incurred claim ratio in health insurance

what is incurred claim ratio
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The health insurance industry has undergone a revolution thanks to new features, improved benefits, and specialized health insurance policies. When it comes to selecting the ideal plan most people are spoiled for options. While there are a few essential factors to consider while evaluating which health insurance plan to buy, looking at parameters such as the incurred claim ratio of an insurance provider can be of additional help.

What is Incurred Claim Ratio?

The Incurred Claim Ratio (ICR) is the ratio of the total claims paid by the insurance company against the total premium collected in a given period. A high ICR shows that the insurance company is paying out a significant amount in claims.  At the same time, a low ICR may indicate that the insurance company is denying claims or not providing adequate coverage to its policyholders.

Know more about Different types of insurance plans

The formula for ICR is:

Incurred Claim Ratio = Net claims incurred / Net Premiums collected x 100

For example, if an insurance company X collected a premium of Rs 1,00,00,000 in a year and paid Rs 90,00,000 as claims in the same period, the ICR would be:

ICR = (Total Claims Paid / Total Premiums Collected) x 100

ICR = (Rs 90,00,000 / Rs 1,00,00,000) x 100

ICR = 90%

This means the insurance company paid out 90% of the premiums collected as claims during the year.

The ICR is particularly important for health insurance because it helps customers evaluate the reliability of an insurance company. A high ICR means the insurance company is paying out claims promptly and efficiently, which is critical when policyholders require medical attention. In contrast, a low ICR may suggest that the insurance company is not financially stable enough to provide adequate coverage or maybe they come up with fictional and frivolous reasons to avoid paying claims.

How to use incurred claim ratio to purchase health insurance?

What does incurred claim ratio indicate?

  • If the ICR of a health insurer is more than 100%, it indicates that the insurance company has settled a higher number of claims than the premiums received during the period. While this may look good on the surface for policy holders, since the company is settling a high number of claims, it is actually incurring a loss in the process. This could mean that the insurance company might increase the premiums in future or reject possible high-risk claims. It is not advisable to buy health insurance from such a company.
  • If ICR is between 50%-100%, the insurance company is making a profit. They are managing to settle the claims from the premiums received in a period. The higher the number, the more claims the insurance company is settling, subject to necessary scrutiny. It is advisable to consider buying plans from such insurers, by checking the consistency and other plan features.
  • If ICR is less than 50%, it means that the provider is not settling enough claims. Of course, they are making more profits. This possibly could be because the insurer is charging unreasonably very high premiums or is rejecting more claims. Buying insurance from such a company may not be a good decision.

A high ICR can give customers the confidence that the insurance company will provide adequate coverage when needed and pay out claims promptly. When purchasing health insurance, it is important to consider an insurance company’s ICR.

For this, you can refer to the report published by the Insurance Regulatory and Development Authority of India (IRDAI) on the performance of the insurance industry as a whole as well as each individual insurance firm. To determine if the insurance business has improved or not in terms of the incurred claim ratio, you can also look to the prior annual reports and the most recent annual report. This apart, you should also consider other factors such as the coverage provided, premium rates, and the reputation of the insurance company.

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