When you buy an insurance policy, it’s important to consider a few ratios that indicate the financial stability and trustworthiness of the company. These ratios can help you make an informed decision.
Here are six important insurance ratios that may help you assess a company better.
Claim Settlement Ratio (CSR)
A higher CSR indicates that the company is more likely to settle the claim as and when it arises.
When an insurer has a low CSR, the premium may be lower as well. While you may be able to save some money on the premium amount in this case, there is a higher chance of your claim being denied.
“So, before purchasing any insurance, compare and analyse the CSR of various insurers to make an informed decision. Because a higher CSR value is associated with increased chances of claim settlement, it is regarded as an important indicator of an insurer's reputation,” says Tarun Mathur, chief business officer, general insurance, Policybazaar.com.
Commission Expense Ratio
This ratio tells us how much of the premium goes into paying commissions. This ratio may or may not directly impact the premium you pay.
After a threshold, the higher the commission expense ratio, the lower the discount offered, leading to a higher premium paid. A low commission expense ratio will usually translate to lower premiums. However, some insurers do not pass it on to the consumers, leaving the premiums unchanged.
“Paying a higher commission means securing more business, which will add value to the insurance company in the long run,” adds Mathur.
This ratio is an important benchmark for insurers. It explains how a committed customer has been renewing his policy every year. It is measured at different intervals—at 13th, 25th, 37th, and 61st months. It measures the trust customers have in the long-term products and services being offered by the insurer.
Persistency ratio is calculated by the number of policyholders paying the premium divided by net active policyholders, multiplied by 100. A high persistency ratio is an indicator of customer satisfaction and a large network of satisfied customers. A low persistency ratio indicates inability to retain customers.
Incurred Claim Ratio (ICR)
The incurred claim ratio (ICR) is equal to the value of all the claims the company has paid divided by the total premium collected during the same period. ICR indicates a general insurer’s ability to pay claims. If the ICR is more than 100 per cent, it means that the total value of claims settled is greater than the total value of premiums collected. In this case, the company would either increase the premium payments or make fundamental changes to the policy to make it profitable. Such companies reject borderline claims. If the ICR is between 50 per cent and 100 per cent, it indicates the best claim settlement ratio. It also indicates that the insurance company has introduced a good product and is making healthy profit.
The solvency ratio is a measurement of a company’s cash flow and liabilities. It helps you to know whether or not the company has adequate funds to manage its short-term and long-term liabilities. A high solvency ratio indicates the company has adequate funds to manage its financial obligations. It is a sign of trustworthiness.
On the contrary, a low solvency ratio means the company finds it difficult to manage its financial obligations and default payments.
Combined ratio: The combined ratio is a measure of profitability used by an insurance company to gauge how well it is performing in its daily operations. The combined ratio is calculated by taking the sum of incurred losses and expenses and then dividing them by the earned premium.