Understanding the Incurred Claim Ratio of Health Insurance Companies

One significant concern about health insurance is how well the insurer processes claims. So we want to know whether they pay out fairly and often. Earlier, the claims settlement ratio (CSR) was the measure of how an insurer performed. Still, now, the Insurance Regulatory and Development Authority of India (IRDAI) has started giving more prominence to the Incurred Claim Ratio (ICR) in its annual reports.

IRDAI also reported that for the financial year 2023-24, the ICR of health insurers had fallen slightly from 88.89% in the previous year to 88.15%. In the past, positive or negative impacts on insurers or policyholders could fall under the CSR category, as insurers issued policies to both of them. Still, this shift from CSR to ICR shows an understanding of insurance more as a distinct entity. It highlights its financial balance sheet impacts on its profitability and, therefore, for the policyholders.

What Is the Incurred Claim Ratio (ICR), and Why Is It Important?

For example, a health insurance company receives its policyholders’ premiums amounting to Rs. 100 in the split of a financial year (such as quarters or monthly). Now, in that financial year, they pay out claims amounting to Rs.  80.

Considering this case, the estimated ICR now settles at 80%. 

An ICR rating between 80% and  100% indicates that the business in consideration is performing well financially since it is not incurring an unreasonable amount of its premium income in claims. 

On the other hand, having an extremely high ICR estimate would indicate that the company is experiencing an enormous volume of claims, which puts it at risk of being unable  to fulfill its financial requirements in the foreseeable future.

How Do You Measure the Incurred Claim Ratio?

The ICR is simple to compute as follows:

Incurred claim ratio formula = (Incurred Claims / Earned Premiums) x 100

• Incurred Claims: This is the total amount of money the insurance company disburses to settle claims for a specified period. It also comprises the amount disbursed on medical issues plus all the overhead expenses of settling the claim.
• Earned Premiums: This is the amount of premium revenue that the insurance business has legitimately earned after deducting refunds, cancellations, and discounts.

What Could Affect a Health Insurance Company’s ICR?

• Claim Experience: A company’s claim experience is a pertinent factor. If a company’s insured population is healthier, then claiming insurance is less likely to arise. If the company has a significant policyholder base with several known pre-existing conditions, then the ICR will undoubtedly be high due to the constantly activated insurance claims.
• Health Insurance Plans: A corporation's specific business model for selling health insurance is also likely to influence its incurred claim ratio. Companies that combine higher limits and broader scope coverage are more likely to increase their ICR compared to basic hospitalization-only policies.
• Underwriting Practices: Some companies are strict in their assessment of providing insurance to particular individuals, thereby reducing their ICR. These companies have stringent rules on the health condition of their policyholders. To mitigate losses, such companies only underwrite those who are more likely to be healthy.
• Expenses: Administrative costs also play a crucial role when determining the issuer’s ICR. Additional expenses incurred while settling claims, along with routine expenses for maintaining administration, can negatively affect a company's insurance upside potential. If companies use automated claim settlement, these firms will incur negligible operational costs.

What is the Importance of ICR in the Claim Process?

As a policyholder of a health insurance policy in India, having a basic idea of the ICR helps in certain ways:

• Evaluating the Solvency of an Insurance Company: A company with a healthy ICR tends to be financially solvent, meaning can meet the reserve requirements and claim obligations. If the company has a favorable ICR, a customer can feel safe and feel that it can pay their claims when needed.
• Choosing a Health Insurance Policy with a Better ICR: It is quite apparent that a lower value is preferred but should not be isolated while making the decision. Before selecting a plan, account for your health conditions, coverage, and hospital network.

What is the Perfect Claim to Incurred Claim Ratio?

Well, that is the tricky part! This will depend on the insurance company’s plan offerings, their marketing plan, and industry-within-claims experience. As an overarching rule, the Indian insurers are considered healthy, with incurred claim ratios ranging between 80% and 100%.

Incurred Claim Ratio vs. Claim Settlement Ratio

Claim settlement ratio is another phrase you could come across while researching health insurance companies. Even though both ratios pertain to how a company deals with claims, each one considers a different factor:

• Incurred Claim Ratio (ICR): This ratio measures  the profitability and loss when the company makes claim payments in relation to the premiums earned.
• Claim Settlement Ratio (CSR): The proportion of actual claims settled by the insurance company to the total number of claims that were legitimately made.

Both Ratios And Their Effects On The Policyholders

• ICR: Having a satisfactory ICR means the company’s financial sustainability, which, as a consequence, lessens the chance of the company failing to meet future claims made by policyholders.
• CSR: The higher the CSR, ideally above 95%, the better it is for policyholders. It signifies that the company actively manages and settles valid claims and reimburses expenses incurred in medical care in a timely manner.

Usage of Incurred Claim Ration When Choosing Health Insurer

In choosing which health insurer to go with, how to use the incurred claim ratio:

Evaluating Insurer Stability

In light of the claim payments pending ratio, an ICR (Incurred Claim Ratio) is an excellent indication of how much an insurance company can afford on its claims. Companies with a strong Incurred Claim Ratio are more possessive of their finances, demonstrating that they would almost always be able to cover your medical costs. Knowing this means that when the time comes to file a claim, the chances of it getting approved are high.

Intra-Company Comparison Ratio

Avoid selecting an insurance provider with the lowest ICR ratio, as using this strategy may backfire on you. Generally, lower proportions are said to reflect greater scrutiny of spending; however, ICRs of competing providers should be considered when available before making the purchase.

• Look For a Balanced One: For ICR comparisons, as in any other case, always aim for the median value. Ratios too low below the average suggest negligence with settlements and not giving out claims, and also too much caution in underwriting risks.
• Consider other players in the market: Having researched the average industry norm might give you an idea of how high the ideal value of the ICR can go.

Current Trends In Incurred Claim Ratios

Analysing existing data on ICRs can reveal a lot about the current status of the healthcare insurance industry of any nation, especially India. There are plenty of reasons that can account for these trends and changes in ICRs, such as:

• Increased Spending on Healthcare: The sustained increase in medical inflation is likely to result in higher claim payouts, which shall, in turn, affect the ICR.
• Changes in the Use of Healthcare Services: Claim severity and frequency can be impacted by things like lifestyle diseases, ageing populations, and medical technology.
• New policies: Health insurance regulations and policies can also affect  ICR and claim payments.

Let’s Make Informed Decisions!

Selecting appropriate health insurance can be challenging! Right?

The Incurred Claim Ratio (ICR) can assist you in evaluating an insurance company's overall investment claims. Armed with enough knowledge of ICR, the decisions you make will be more informed. 

ICR is equally important, but you should also pay attention to the claims settling ratio, the panel of hospitals, customer care, and other essential policy benefits. A company with a reasonable ICR and has settled claims in the past is very good because they receive peace of mind that they will be looked after during unfortunate medical situations.

Disclaimer: This is not a suggestion but an information piece for general and educational use. When making any type of insurance choice, always do your due diligence and speak to a competent financial specialist.