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Buying a term plan? Buy from the green list

  • Claims settlement rate in FY18 is higher by policy count compared to the sum assured, perhaps because big-ticket early claims get rejected more often
  • In case of pure protection plans looking at the sum assured is important because a higher death claim settlement rate using this metric indicates that the insurer doesn’t discriminate between small- and big-value claims

We have always advised our readers to buy a term plan for their life insurance needs. A term plan is the cheapest form of life insurance as it only charges the cost of insurance and keeps out any investment benefits. While the basic filter of cost is important to see while sifting through the plans available in the market, it’s not sufficient. It is equally important to filter out insurers on the basis of their record of settling death claims.

Of course, life is a little easier now that regulations prohibit insurers from denying claims that come after three years of buying a policy, but a high repudiation rate, even when it’s on account of claims that occur in the first three years, is a cause for worry. Claims settlement record, among other things, reflects the underwriting practices of an insurer. 

The Insurance Regulatory and Development Authority of India (Irdai) gives out death claims settlement figures for retail policies from all the 24 life insurance companies in its annual report; the FY18 report was released earlier this month.

(Santosh Sharma/Mint)

We have always advised our readers to buy a term plan for their life insurance needs. A term plan is the cheapest form of life insurance as it only charges the cost of insurance and keeps out any investment benefits. While the basic filter of cost is important to see while sifting through the plans available in the market, it’s not sufficient. It is equally important to filter out insurers on the basis of their record of settling death claims.

Of course, life is a little easier now that regulations prohibit insurers from denying claims that come after three years of buying a policy, but a high repudiation rate, even when it’s on account of claims that occur in the first three years, is a cause for worry. Claims settlement record, among other things, reflects the underwriting practices of an insurer. 

The Insurance Regulatory and Development Authority of India (Irdai) gives out death claims settlement figures for retail policies from all the 24 life insurance companies in its annual report; the FY18 report was released earlier this month.

How to look at it 

The annual report documents the total number of death claims for retail policies that each insurer gets—by the number of policies and the benefit amount or the sum assured during the year. These then go in four buckets: claims settled, claims rejected, claims unclaimed and claims pending at the end of the year. For most insurers, the bucket of unclaimed claims is nil to tiny.

Looking at claims settled both by the number of policies and benefit amount is important, said Kapil Mehta, co-founder, www.securenow.in. “Looking at the percentage of claims settled by the number indicates how routinely the insurer settles death claims. A higher percentage of claims settled indicates a strong system for claim settlement, so policyholders who are going for bundled plans with small life insurance cover can be satisfied with a good settlement record by policy number," said Mehta. 

But what if you are in the market to buy a high-value term plan? Imagine A, B and C buy life insurance. A and B buy a cover or sum assured of 10 lakh each whereas C buys a cover of 20 lakh. All of them die. Families of A and B get the claim but that of C is denied the claim. Going by the number of policies, the insurer settled 67% of the claims but if you go by the benefit amount, the settlement rate drops to 50%. That is why looking at claims settlement only by the number of policies is not enough. The percentage of claims settled by the benefit amount is crucial. “A high settlement rate going by the benefit amount indicates the insurer is willing to settle even high-value claims. This stems from good underwriting practices at the time of policy sale that eliminates instances of fraud or misrepresentation that show up as early claims,"added Mehta. 

Looking at the percentage of claims settled by the benefit amount becomes all the more crucial when you are buying a term plan. “In case of pure protection plans looking at the sum assured is important because a higher death claim settlement rate using this metric indicates that the insurer doesn’t discriminate between small- and big-value claims. This will happen if the sales practices are good and the policies are underwritten well at the time of sale," said K.S. Gopalakrishnan, chief executive officer, RGA Reinsurance Company’s India business. 

The report card 

As per the regulator’s annual report for FY18, on an average, the death claims settlement record for the industry has improved. For instance, going by the number of policies, the average settlement record in FY17 was 91.60%, which increased to 94.01% in FY18.

According to Gopalakrishnan, insurance companies should be settling at least 97% of the death claims, and in FY18 nine insurance companies made the cut compared to six in FY17. However, when you look at the number through the lens of benefit amount, the picture is not that rosy. In FY17, the industry, on an average, settled only 84% of the death claims and it improved to 88% in FY18. In fact, in FY17 none of the companies reached a claim settlement rate of 97% and in FY18, only Edelweiss Tokio Life Insurance settled 98% of death claims by the benefit amount. 

The claims settlement rate looks much healthier going by policy count compared to the benefit amount and this is primarily on account of high-value claims getting rejected. “Rejection usually only happens after due medical evidence. In case of death claims, rejection mostly happens in early claims for the industry. After three years the claims settlement for most insurers is nearly 100%. The biggest reason for early claim rejection is concealment of pre-existing conditions. These concealments happen for larger amount benefits leading to a somewhat higher rejection rate in the larger ticket size cases," explained Ashish Vohra, executive director and chief executive officer, Reliance Nippon Life Insurance Co. Ltd. Reliance Life settled 95% of the claims by policy number but only 86% of the claims by benefit amount.

According to R.M. Vishakha, chief executive officer, IndiaFirst Life Insurance Co. Ltd, a big delta in the case of IndiaLife is due to the high-value pending cases due to unclear title of the nominees. IndiaFirst settled about 90% of the claims by policy number, whereas by benefit the settlement was only 80%. In fact, IndiaFirst Life is also among the bottom five insurers going by claims settlement both by benefit amount and policy count. “One could argue that the on-boarding process could be strengthened but then, we are making the process difficult for 90% of the genuine customers to weed out the 10% of fraudulent customers. We are a nine-year-old company and our focus has been on retail business for the last three years. This presents us with a situation of having a high percentage of early claims that impacts the claim settlement percentage. This will improve as we build up our retail portfolio,"added Vishakha.

Claims reporting is another area that needs attention as per an executive of a private insurance company who didn’t want to be named. “The industry should adopt a standardised approach on reporting claims. Currently some companies don’t book claims that appear fraudulent or where documentation is incomplete. As a result, the settlement rate looks better. The life insurance council is, however, working on standardising this," he said. 

What should you do? 

While rejections may pertain primarily to early claims, it’s still a cause of worry given the gaining popularity of term plans. The practice for smooth on-boarding can be counterproductive if underwriting is done at the time of claims. Tracking claims settlement record of an insurer is important. In fact, in our regular term plan table, not only do we give you the cheapest term plans but we also showcase the claims settlement rate by benefit amount. Track this number, but don’t palm off the entire responsibility to your insurer.

You also need to make sure you disclose all the relevant information at the time of buying a policy because life insurance after all is a contract based on good faith. Dishonesty can land you in trouble, especially if it’s an early claim.

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