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Photo: iStock

Opinion | Good claims experience is the road to building a reputation in insuran

Insurers have to find the right balance and have an ICR that isn’t too high or too low

I recently moderated a panel on health insurance. The audience consisted of many from the hospitals, the government, and armed forces. Our focus was on the deep reach of insurance—over 400 million lives covered, not factoring in Ayushman Bharat, and how premiums were set. Yet, the most intense discussion took place on two specific cases. A serving officer was irritated that standard insurance excluded incidents related to war and another retired person was anguished that his NGO was unable to get any kind of insurance for cancer patients. This made me think that no matter how deep insurance’s penetration is, it will always be the uncovered risks and persons that will stand out. The number of such uncovered risks has reduced but there remain many areas that are difficult to insure.

The most obvious are in health insurance. It is hard to buy insurance if you suffer from a critical illness, are a senior with chronic ailments or are mentally challenged. It is understandable that diseases once diagnosed cannot be insured but in all the cases I have described, insurance is difficult to get even for ailments unrelated to pre-existing conditions. Medical costs outside of inpatient hospitalization are largely uncovered. Several treatments today require neither inpatient nor day care, and so are not paid for. Diovan, a drug that prevents relapse of heart conditions is uninsured because it is preventive in nature. An organ transplant requires medication for extended periods but these costs are excluded after the customary 60 days of post-hospitalisation care. Similarly, dental treatment and cosmetic surgery are generally not insured.

The examples from health insurance are the ones we are most familiar with but there are areas in other insurances that often get left out, particularly for individuals. In home insurances, loss of cash; in personal accident, adventure sports; in travel insurance, pre-existing conditions. Defective land titles and cybercrime are largely uninsured for individuals. War and war-like situations are a common exclusion across insurances.

Coverage is improving as insurers understand risks better and are armed with more data. Today, there are a few products for people suffering from cancer, cardiac issues or diabetes. At least three insurers will cover accidents during adventure sports, some will allow emergency treatment pertaining to pre-existing health conditions during overseas travel, and terrorist and war-related risks can be covered at a cost. Expanding coverage builds goodwill for the industry.

There are other ways to build reputation. Typically this has been driven by claim settlement rates, which is the proportion of claims that get paid. But there is another statistic that is a good pointer to long-term viability and market presence. This is the incurred claims ratio (ICR), which provides valuable insights into an insurer’s business. The ICR was published last month by the IRDAI in the Handbook of Insurance Statistics. It is the total value of claims paid over the total premium collected. The advantage of this over traditional claims ratio is that it captures premium rates and gives a better insight into an insurer’s economics. The ICR ratio is the main driver of underwriting profit. Devotees of Warren Buffet would have seen the concept described each year in the Berkshire Annual Letters.

A low incurred claim ratio means that claims are not being paid or the prices are too high. In domestic and international travel insurance, the ICR is 8% and 35% respectively, which is extremely low. Since absolute premiums are already small in these segments, insurers could consider improving the coverages and paying more claims in these categories. A high ratio suggests that the business is not viable. Government health insurance schemes have claim ratios of 107%, which means that the business is entirely loss making. In terms of performance, there are marked differences between the public and private sector insurers. For example, in health insurance, the government insurers had a loss ratio of 108% whereas the stand-alone private health insurers had 62%.

Insurers have to find the right balance of having an ICR that is neither too high nor low. This is also important from a buyer’s perspective because it ensures that claims are paid and the insurer remains viable.

Kapil Mehta is co-founder,

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