When buying insurance, the idea is that the insurance company should make a payout when the need arises. Before buying insurance, there are certain metrics you can check. These are mostly ratios that the insurance company needs to report. These ratios, for one, point to how many claims the insurance company has settled. There is also an indication of the value of the claims that the insurer has settled. There is another ratio that indicates the financial strength of the company and how likely the insurance company is to pay claims in the future. These ratios thus provide the buyer with some solid indication of how the insurance company has performed to date and also how it is likely to fulfill its obligations going ahead. We take a look at some key ratios and what they mean.
The Claim Settlement Ratio
The Claim Settlement Ratio (CSR) is the percentage of claims settled out of total claims accepted, providing you with some idea of how likely your claim is to be settled. The Claim Amount Settlement Ratio (CASR) represents the total claim paid versus the total claim accepted and tells you whether high-value claims are fully paid.
While CSR is most commonly used, CASR provides even greater insights. “For example, an insurer may have a high CSR and low CASR, meaning that it settled mostly small-value claims while rejecting or reducing the amounts of higher-value claims. In an ideal world, however, you should look at both to have a reasonable understanding of the insurer's reliability,” says Kunal Varma, CEO and Founder, Freo.
The Solvency Ratio
The Solvency Ratio demonstrates an insurer's future claim-paying capacity, serving as an indicator of the company's financial robustness and readiness. The Insurance Regulatory and Development Authority of India (Irdai) mandates a minimum solvency ratio of 1.5.
A solvency ratio greater than 1.5 means that the insurer is financially stable. This ratio is especially valuable for long-term products such as life insurance, where claims can take decades or more to present.
How To Interpret These Ratios
However, these ratios can be confusing. An insurer might settle a bunch of smaller claims (which may increase the CSR) but reject and reduce larger claims (which would reduce the CASR). This is why it is important not to think about CSR in a vacuum.
“Ideally, policyholders want to have both a high CSR and a healthy CASR (plus a strong solvency ratio) when purchasing any insurance. This will give the policyholder the best chance both to have their claim approved and to get the full amount of it when they need it most,” says Varma.
