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How to Calculate Incurred Claim Ratio in Health Insurance?
People nowadays have plenty of options when it comes to buying a health insurance plan for themselves or their family. To choose wisely, experts recommend comparing insurers based on key parameters. One such parameter is the Claim Settlement Ratio (CSR), but it is not the only metric. Incurred Claim Ratio (ICR) is another useful yardstick for evaluating the performance of an insurer. Let's learn more about ICR in health insurance.
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- How to Calculate Incurred Claim Ratio in Health Insurance?
Meaning of Incurred Claim Ratio in Health Insurance
Incurred Claim Ratio, often shortened as ICR, is the ratio of the net claim settled by the insurer to the net premiums collected in any given year. This ratio offers insight into the financial stability of the insurance provider. When choosing a mediclaim plan, it is advisable to consider health insurance companies with a balanced ICR.
The Insurance Regulatory and Development Authority of India (IRDAI) publishes annual reports containing the latest ICR data for all general and health insurance companies in India. Notably, while the Incurred Claim Ratio is a useful factor to consider, it should not be the sole basis for your decision.
How to Calculate ICR in Insurance?
The ICR of any health insurance company can be calculated by dividing the net claims incurred by the net premiums collected in a financial year.
The Incurred Claim Ratio formula is:
Incurred Claim Ratio = Net Claims Incurred / Net Premiums Collected
Let's understand this with the help of an example.
For example, in 2023, a company earned ₹10 lakh in premiums and settled total claim of ₹9 lakh. In this case, the ICR will be 90% for 2023.
Significance of the Incurred Claim Ratio
Generally, the Incurred Claim Ratio indicates the financial health of a company. A high ICR is considered good for investors and existing policyholders because it shows that the insurance company is successfully settling the claims raised. Therefore, you can rely more on insurers having a high ICR. But from the insurer's perspective, a higher ICR ratio indicates lower profits.
For instance, in the above example, a 90% of ICR indicates that 90% of the premiums collected or earned in the year are spent towards settling claims and the balance 10% is the profit margin. If the ratio in 2024 increases to 95%, the profit of the insurer will fall from 10% to 5%, which will be bad from the company's revenue experience but good for the customer. Moreover, the ratio above 100% indicates that the insurer is incurring losses because the premium collection is not sufficient enough to settle claims and so the company is probably using its reserves to pay for claims, which is not a good indicator.
Factors to Consider While Calculating Incurred Claim Ratio
Though the Incurred Claim Ratio is a good metric to measure the company's performance, yet it does not reflect the bigger picture. Here are some of the crucial factors that you must keep in mind when calculating ICR:
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Time Taken to Settle Claims
Though the ICR measures the claims settled against the premium collected, it does not take into consideration the time taken for settling the claim. For instance, an insurer with a good ICR of 90-95% might still take 4-6 months to settle claims. This delay can result in a frustrating experience for policyholders, even if the insurer maintains a favourable ratio. This means that a smooth and timely claim settlement process is equally important.
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Low Earnings Initially
A start-up insurer may not earn substantial premium in the initial years of operation and the claims experienced may be high. As such, the Incurred Claim Ratio will tend to cross 100% which should not be interpreted as the insurer making a loss because the initial years may have a higher claim incidence.
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Claims Management Practices
ICR does not reflect how effectively claims are managed. Insurers with hassle-free, and customer-friendly claim settlement processes are more likely to offer a better experience, even if their ICR is moderate compared to others.
FAQs
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Q1. How to calculate claim ratio in health insurance?
Ans: The claim ratio in health insurance is calculated by dividing the total claims paid by the insurance company by the total premiums collected. It is expressed as a percentage and helps insurers determine how much of the premium income is being used to pay for claims. -
Q2. How much incurred claim ratio is good?
Ans: An Incurred Claim Ratio (ICR) between 80% and 100% is generally considered good. This range shows that the insurer is using the premiums collected efficiently to pay for claims. -
Q3. Is Incurred Claim Ratio (ICR) same as Claim Settlement Ratio (CSR)?
Ans: No, ICR and CSR are not the same. They are two different metrics used in insurance. The Incurred Claim Ratio shows the percentage of the total premiums collected by an insurance company that is spent on paying claims. On the other hand, the Claim Settlement Ratio indicates the proportion of claims settled by the insurance provider out of the total claims received.
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Disclaimer: The list mentioned is according to the alphabetical order of the insurance companies. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. For complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website www.irdai.gov.in
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