Personal Finance: Six ratios to know when buying insurance

Most people either rely on what their agents advise or look for common cues such as claim settlement ratio (CSR) to determine the credibility of an insurance company before buying any of its plans.

DNA Money spoke to experts to find out the ratios that mirror the performance of an insurance company. Industry statistics coupled with expert views shared in the article will help you understand the various insurance ratios before buying an insurance policy.

1. Persistency ratio: The business of insurance is long term. It is the total amount of business that the insurance company is able to retain in that particular year without the policy being lapsed. This means that it is important for the insurance company that the policyholder pays premiums towards policy renewals. The insurers measure the net premiums received on the 13th month, 25th month, 37th month and 61st month of the policy tenure.

Anand Prabhudesai, co-founder, Turtlemint, says, "From the insurance industry perspective, retention of customers is important as it increases the insurance penetration as well. Renewal of premium reduces the overall cost of the product through economies of scale which benefits the entire industry as a whole. From the insurer's perspective, when the insurer receives a renewal premium, only then they will be able to build up their reserves to be able to pay future claims. From the customer perspective, only when the renewal premium is paid, their policies continue and so does their insurance coverage."

2. Solvency ratio: This value mirrors the company's financial condition. As per the Insurance Regulatory Development Authority of India (Irdai) guidelines, it is important that insurers maintain a minimum solvency ratio of 150% to avert the bankruptcy risk in the event of sudden claims. CS Sudheer, founder and CEO,IndianMoney.com, says, "The amount of available solvency margin (ASM) to required solvency margin (RSM) is the solvency ratio. The ASM gives the value of the insurers' assets over the liabilities. Assets include fixed and investment assets while liabilities include claims, surrender and maturity benefits. The RSM is based on net premiums as per IRDA guidelines."

Ashwin B, chief operating officer, Exide Life Insurance, says, "Solvency ratio indicates the capacity of the insurer to withstand any adverse future experience without compromising the policyholder's interest. A lower solvency ratio (below 1.5) would definitely be a cause for concern. However, a very high solvency ratio may also indicate a less efficient use of the capital. Hence a balanced level of solvency ratio would be in the range of 1.5 to 2.5."

3. Combined ratio: Any general insurance business involves a lot of expenses that includes operating costs, commissions paid to agents and incurred claims that must always be lesser than the net amount of premium earned. It is always advisable to opt for a general insurance company with a lower value of the combined ratio. Companies such as Reliance General Insurance Company, IFFCO Tokio General Insurance Company and Kotak Mahindra General Insurance Company are known to have a combined ratio beyond 100.

4. Incurred claim ratio (ICR): It is actually the ratio of the total amount of claims paid by the general insurance company to the total amount of premiums earned in any financial year. Vineet Patawari, co-founder, StockEdge and www.elearnmarkets.com, says, "Incurred claim ratio is a barometer of the health of an insurance company, especially, for health insurance companies. It essentially signifies how much an insurance company is paying for settlement of claims as a percentage of the annual premium they collect from policyholders. Insurance buyers should look for 70%-90% ICR in a company." Avoid insurance companies with an ICR value beyond 100%.

5. Commission expense ratio: This ratio highlights the amount that goes towards payment of commissions relative to the written premium during the policy period. Naval Goel, CEO and founder, PolicyX.com, says, "Insurance company's credibility does not affect on the basis of its commission expense ratio. Paying higher commission means securing more business which will in long run add value to the insurance company making it enable to pass benefits to its customer base. Choosing an insurer with a higher commission expense ratio may not be the right idea and that is because of the fact that after a threshold, the higher the commission expense ratio, the lower the discount offered which will lead to a higher premium amount which is definitely not a good thing for consumers. However these days, with the growing digitisation, the company started running its operation online which makes it easier for the customer to buy effective policies at affordable prices as there is no agents' commission in the online process."

6. Claim settlement ratio: There is no point in buying a policy if it gets rejected in the hour of need. A higher CSR indicates that the company is more inclined to settle the claim, if and when needed. Adhil Shetty, CEO, BankBazaar, says, "If an insurer has a low CSR, the premium may also be lower. However, the chances that the claim may be rejected is higher. In this case, while you may be able to save some money on the premium amount, there is a possibility that your claim is rejected when the need arises. So, compare and analyse the CSR of various insurers to make an informed decision before buying any insurance."

Since a higher CSR value is synonymous with increased chances of claim settlement, it is deemed to be an important measure of an insurer's reputation. Raj Khosla, founder and managing director, MyMoneyMantra.com, says, "Insurance regulator Irdai publishes an annual report for various insurers and shares the CSR rates for each insurer. Customers must always compare the CSR before choosing a pure risk cover such as Life Insurance or Term Plan."