Why Claim Settlement Ratio is the wrong parameter to look at? 2022

By | July 5, 2022

Do you understand exactly what is the claim settlement ratio in insurance?

Many people just look at the claim settlement ratio and form an opinion about the insurance company. In this article, I break down some myths and help you understand more about the claim settlement ratio.

What is Claim Settlement Ratio?

In simple words, claim settlement ratio is the percentage of claims paid in a financial year.

Claim Settlement Ratio = (Number of Claims Claimed / No. of Claims Received)

So if a company receives 1000 claims in a year and pays 985 of them, then its claim settlement ratio for that year will be 98.5%. An important point to note here is that it is about the number of claims and not the number of claims.

What types of claims are considered in the claim settlement ratio?

Generally, most of the people who want to buy a term plan look for this ratio as they are concerned about the claim to be paid in case of their premature death. But Claim Settlement Ratio is not the same as “Death Claim Settlement Ratio”

In computing the claim settlement ratio (in case of life insurers), all types of claims are considered equal.

  • death claim: Claims after the death of the policyholder
  • maturity claimPolicies that are maturing and need to be settled
  • surrender claims: policies that close prematurely and surrender

here is the breakup IRDA Report 2019-2020Where you can see the number of claims of LIC and private insurance companies

Details of Types of Policies in Claim Settlement Ratio as per IRDA Report 2019-2020

Is Claim Settlement Ratio a Possibility?

One of the biggest myths about CSR (Claim Settlement Ratio) is that it is the potential for claim settlement. This is not true and often leads to the wrong decision of the insurance company.

CSR is just a way of representing data and nothing else. It doesn’t tell you about the intention of the company. let me share it with an analogy

Imagine there are two visa processing counters that are looking at people’s documents and granting or denying a visa.

Now if the visa will be approved or rejected it mainly depends on how proper the documents are and not on the person and the person who is processing the visa. If the document and the matter comes in the prescribed rules, then it will be approved, otherwise it will not.

So imagine there are two counters A and B. Counter A rejected 5 out of 100 people and counter B rejected 7 out of 100 people.

Now, it simply means that counter A found 5 people who did not fit the prescribed rules or had problems with their documents. Similarly counter, B found 7 people who had incomplete documents.

Claim settlement ratio is not a possibility

One cannot mistake these as 93% (a) and 95% (b) of their visa being rejected.

So, in the same way, the claim settlement ratio tells you what kind of claims the insurance company received and how many of those claims were rejected. it’s unlikely.

Investors have a very bad view of most companies and attribute these disapprovals to their intentions, which is not a correct way to look at this ratio.

Does the claim settlement ratio depend on the policyholder?


Whether a claim will be rejected or accepted mostly depends on the policyholder. There are many people who file a claim which is bound to get rejected as it is not valid as per the terms and conditions of the policy document.

Many policyholders also have a very vague and misconception about what is covered and what is not. They file claims on the basis of frivolous assumptions and for things outside the purview of the rules.

I’ll give you an example.

Imagine a person who lied to the company while taking term/health insurance, that he is a smoker and has also undergone any surgery in the past. He lied to the company.

After some years the claim was filed (the person died or got hospitalised) and now the company came to know that the information provided by the insured was false and hence the claim should not be paid in this case and This is a completely valid disclaimer.

So here it is not the company that had the wrong intention, but the customer created a situation that led to the claim rejection. Most of the policies that are rejected fall into this category.

You have to understand one thing from your side. If you have purchased your policy properly and have disclosed all the information correctly, your claim will not be rejected. However, if you give the company a reason to deny your claims, it will definitely be denied and there is nothing wrong with that.

What is Claims Information Ratio?

Claim Settlement Ratio tells you about “Number of Policies”, while Claims Intimation Ratio tells you about “AMOUNT”.

It tells you what percentage of the claim amount was paid out of the total claim amount claimed in a year.

Claim Intimation Ratio = (Amount Paid / Total Claim Amount)

Most of the people are not aware of this ratio, and it gives you better clarity about the claims paid by the company. It may happen that one company has a higher claim settlement ratio, but its claim information ratio is lower than that of another company.

Claim Settlement Ratio Data for 2019-2020

Here is an example of how claim settlement ratio can be high despite low information ratio

Company A and B receive 10 claims in a year as follows

  • 9 claims of Rs 10 lakh each
  • 1 claim of 1.1 crores
Company A Company B
claim denied 1 claim of 1.1 crore rejected 2 claims of 10 lakh rejected
claim settlement ratio 9/10 = 90% 8/10 = 80%
claim information ratio 90 lakh / 2 crore = 45% 1.8 cr / 2 cr = 90%
Comment Claim settlement ratio is high, but not the amount paid Claim settlement ratio is lower but higher amount paid

business model of an insurance company

As a customer, you need to be very clear about business model of an insurance company, An insurance company is a for-profit organization that aims to remain profitable and work towards its own profitability as well as serving its customers.

The insurance company collects a small premium from a large number of people, but that money eventually goes to only a handful of people who file claims. So in a way it is a shared resource which is given to the legitimate claimants.

business model of an insurance company

To remain in business and be profitable, an insurance company has to deny all claims that are not valid. If they start paying each claim without proper verification, they will not survive and it is not in the interest of the customer.

It simply means that a company that does not have the best claim settlement ratio is, in fact, a good company because it knows how to protect itself and not allow fraudsters to make false claims.

An important point to note is that a new insurance company will mostly receive death claims in the initial 8-10 years and not any maturity claims, which means their claim settlement ratio may be lower.

How to buy insurance policy?

Basically here’s a high-level step-by-step process

  • Look for a company whose name you trust
  • Choose a company that is a few years old (it’s up to you)
  • Choose a company whose product you like (features etc.)
  • View other investors’ online experiences about the company
  • Buy the policy honestly and disclosing all the details

Don’t Lose Your Sleep Over Claim Settlement Ratios

In conclusion, I just want to say that claim settlement ratio is not a useful metric for any purpose and you should not lose your sleep over it. Don’t worry too much.

How I survived a Credit Card fraud today!

Also read ;- How to sell on Facebook Marketplace

2 thoughts on “Why Claim Settlement Ratio is the wrong parameter to look at? 2022

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