Six ratios to rate your insurer: The higher the claim settlement ratio, better is it for the policyholder
By Rakesh Goyal
When it comes to buying an insurance policy, there are six specific ratios which identify the insurer’s strengths and weaknesses as well as its financial performance. So, the next time you go to get an insurance policy, consider these six ratios to gain a better understanding of the product.
The persistency ratio is calculated by dividing the number of policyholders paying premiums by the net active policyholders, multiplied by 100. If the persistency of the insurer is very good for the 25th or 61st month, that would mean individuals have continued to invest in the policies of that company.
The solvency ratio suggests insurance companies’ ability to service claims. Rules require insurers to have a solvency ratio of 150%. So the higher the solvency ratio, the better the prospectus of insurers to pay the claims. The solvency ratio is the actual solvency margin (ASM) divided by the required solvency margin (RSM).
Another important ratio from the policyholder’s perspective is the incurred claim ratio (ICR). It is the value of all the claims paid by the insurer divided by the premiums received in a particular year. If the ICR is more than 100%, it means the insurer is paying more claims compared to the premium it receives. ICR lower than 100%, or between 50 and 75%, indicates it is making good profits.
This ratio indicates the underwriting process of the insurance companies. The underwriting process is where the insurer determines whether or not and on what basis it will accept an application for insurance. A combined ratio of more than 100% shows that it is paying more in claims compared to the premiums received while a combined ratio of less than 100% shows that insurers are generating underwriting profits.
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