How To Calculate Incurred Claim Ratio In Health Insurance?

The aim of taking any insurance coverage is to reduce uncertainty by transferring the risk of incurring a monetary loss due to the occurrence of an insurable event to a financially stronger entity – called an insurance company. So, by paying a pre-decided or predictable premium, the risk of suffering an unpredictable loss is covered through insurance.

Paying a premium for insurance coverage would only be fruitful if a claim is honoured when such a request is made following the unfortunate happening of the insurable event. So, ensuring the claim settlement capability of an insurer must be ascertained before taking health insurance coverage.

What Is The Incurred Claim Ratio?

As the sole aim of taking insurance coverage is to get the monetary losses compensated by the insurance company following the unfortunate happening of an insurable event, one should choose an insurer that has the capability of settling insurance claims of the insured persons. Otherwise, paying premiums would become useless if a health insurance holder fails to avail of cashless hospitalisation or get the treatment money reimbursed at the time of any illness or accident.

It’s the Incurred Claim Ratio that reveals an insurance company’s capability or ability to pay claim money. So, it’s advisable to check the Incurred Claim Ratio before selecting an insurance company to get a health insurance cover.

How To Calculate Incurred Claim Ratio?

The Incurred Claim Ratio for a year is calculated by dividing the Net Claims Incurred in that year by the Net Premiums Collected in the same year.

Percentage of Incurred Claim Ratio = (Net Claims Incurred / Net Premiums Collected) X 100%

If the Net Claims Incurred in a year is Rs 80 crore and the premium collected in that year is Rs 100 crore, the percentage of Incurred Claim Ratio will be (Rs 80/Rs 100)X100 per cent or 80 per cent.

A higher premium collection and lower claim incurred will lower the Incurred Claim Ratio. On the other hand, Incurred Claim Ratio will be higher if claim incurred is higher or the premium collection is lower.

In case the incurred claims remain constant, a higher premium rate will lower the Incurred Claim Ratio and a lower rate of premium would enhance the ratio.

Contributions of young individuals in the insurance pool would ensure lower health insurance claims and would lower the Incurred Claim Ratio.

As claims are settled out of the insurance pool formed by collecting insurance premiums, for the sustenance of an insurance company, the outflow of claim amount in a year should be less than the inflow of premiums in that period.

Why Is Incurred Claim Ratio Important?

Mostly, people check the Claim Settlement Ratio – which reveals the percentage of claims settled versus the number of claims generated – before choosing a health insurance provider. Although the Claim Settlement Ratio is also important to see an insurer’s intention to pay claim money, it’s the Incurred Claim Ratio that reveals the health insurance company’s capability of settling claims. Selecting an insurance company with a healthier Incurred Claim Ratio would enhance the prospect of getting a claim request settled.

On the other hand, if a health insurance company has an unfavourable Incurred Claim Ratio, it may face a depletion in the insurance pool. This may force the insurer to reject some claims or hike premium rates for survival. In both cases – be it rejections of claims or a hike in premium rates – the insured persons would suffer.

So, along with other parameters, checking the Incurred Claim Ratio of a health insurance company is important before applying for a health insurance plan offered by the insurer.

How To Review Incurred Claim Ratio Of A Health Insurance Company?

The insurance governing body – the Insurance Regulatory and Development Authority of India (IRDAI) – collects the data related to the Incurred Claim Ratio of health insurance providers periodically and publishes the ratio in its publications. So, not only before applying for a health insurance plan, but also during the policy period, an individual may check the performance of a health insurance company and decide his/her course.

What Does The Incurred Claim Ratio Indicate?

An Incurred Claim Ratio below 100 per cent indicates a positive inflow of funds – through higher premium receipts and lower claim payments – for a health insurance company. A lower Incurred Claim Ratio would mean a stronger financial health for an insurer. However, if the ratio falls below 50 per cent, it would indicate deliberate rejections of claims by the health insurance provider.

On the other hand, if the Incurred Claim Ratio exceeds 100 per cent, it would indicate a higher outflow of claim money than the premium inflow in a given period. Which would deplete the insurance pool and create a survival issue for the insurer. Such a situation may arise if a health insurance provider offers policies at a cheaper premium without proper screening to attract more customers – resulting in higher claims outflow and lower premium collection.

One should remember that a health insurance plan issued after proper screening would reduce the hassles of the claim request process and enhance the prospect of settlement of claims. Otherwise, after paying the premiums for years to an insurance provider having a weak Incurred Claim Ratio and a lower Claim Settlement Ratio the basic purpose of taking the insurance coverage – i.e. getting the claim money at the time of hospitalisation – may be defeated.

Conclusion

Taking health insurance cover is very important. But, instead of applying for a cheaper plan without pre-policy checkup, a person should check policy features, the Incurred Claim Ratio, and the Claim Settlement Ratio of the insurance provider to ensure a higher prospect of getting his/her claim requests honoured.