In this era, trust is not a privilege. It is to be earned by building a sense of transparency and standing true to the word.
Insurance companies tend to earn a bad reputation when claims go unsettled due to frivolous reasons. In order to foster better relationships between insurers and policyholders, the Insurance Regulatory and Development Authority of India promoted the claim settlement ratio. It tells you whether or not an insurer is reliable enough, which in turn affects the coverage of your life and term insurance plans.
Let’s understand this concept and its impact more deeply.
What is the claim settlement ratio?
When approaching an insurer to purchase life insurance, health insurance, car insurance, etc., you need to trust that they will have your back. The claim settlement ratio of an insurer is the simplest numerical guarantee of that trust.
The claim settlement ratio is a percentage representation of the number of claims filed by policyholders in a given year and the number of those claims settled by the insurer. It is an intangible figure that tells you if the insurer will likely settle your health, car, or life insurance claims.
While selecting your insurer, you can check their claim settlement ratio on the IRDAI’s official website. Every insurer is obligated to work under the regulations of the IRDAI, which allows them to closely monitor the activities and reliability of the insurer, thus providing you with an accurate figure for any financial year. The higher the claim settlement ratio of an insurer, the higher the chances of it settling your general life insurance or term insurance claims in the event of your demise.
How the claim settlement ratio impacts term insurance coverage
The claim settlement ratio of an insurance company has a direct impact on all your insurance products. A term insurance policy is a form of life insurance coverage that allows you to choose specific conditions, including shorter policy tenures.
When you purchase a term insurance plan, you are purchasing the future financial security of your loved ones. You need assurance that in the event of your unfortunate demise, the insurance company will provide adequate coverage for the premium you paid so they are free of financial burdens. The sum assured, i.e., coverage, paid as the death benefit, is the sole important factor in your term insurance policy.
Choosing an insurer with a high claim settlement ratio indicates that when the need arises, they will pay the death benefit to your beneficiaries. However, if the coverage of your term insurance is high, a less reliable insurer, i.e., someone with a low claim settlement ratio, is likely to find loopholes to avoid paying. On the other hand, an insurer with a low claim settlement ratio is more likely to settle term insurance claims with a lower sum assured, as the smaller amount helps them build their reliability.
The claim settlement ratio percentage indicates the number of claims filed vs the number of claims settled. It does not tell you the quality of the settlement, i.e., the coverage that was successfully paid to the beneficiaries of the policyholder.
How to choose the right term insurance coverage based on the claim settlement ratio?
Term insurance plans usually offer high coverage at reduced premiums for shorter policy tenures. This quality makes term insurance plans so desirable in the modern age.
Typically, companies that have low claim settlement ratios also offer even lower premiums. This may tempt you to purchase a term insurance policy from an unreliable vendor. Contrarily, a reliable insurance company with a higher claim settlement ratio in the high 90s will ask for slightly higher premiums and offer higher coverage, which they are bound to settle in compliance with the IRDAI regulations.
When choosing the coverage of your term insurance plan, take a closer look at the claim settlement ratio of the company. If the ratio is below 90%, and you have no other option but to choose the unreliable vendor, then it is best to select lower coverage.
For instance, if you purchase a 1 crore term insurance plan from a company with an 89% claim settlement ratio, the amount may be too high for the vendor to settle. This is because the low claim settlement ratio prevents other insurance seekers from approaching the company, which results in a loss of funding. Thus, 1 core term insurance becomes an unmanageable amount. But if the term insurance coverage was 25 lakhs, they are more likely to raise the funds in due time and settle your claim, thus maintaining their CSR.
Insurance companies with a higher claim settlement ratio invite more policyholders due to the trust they instil. Thus, they have a constant source of funding that they can reallocate to settle your higher or lower-term insurance coverage. Ergo, it is always wiser to choose an insurer with a high claim settlement ratio.
Also Read: When Is Life Insurance Considered a Deductible Business Expense?
