How to Calculate Incurred Claim Ratio in Health Insurance
Incurred Claim Ratio (ICR) is the baseline for rating an insurance company's performance. ICR is the ratio of the insurance company's net claims payments to its net premiums collected over a fiscal year. It demonstrates how quickly an insurance company resolves claims.
The IRDAI publishes information on the ICR for all enterprises once a year. In addition, the IRDAI, or Insurance Regulatory and Development Authority of India, publishes the Incurred Claims Ratio for Indian health insurance carriers.
In this blog, we shall learn what is ICR, how an Incurred Claim Ratio is calculated in a Health Insurance Plan, its importance, what it indicates, and factors to remember while calculating it.
The full form of ICR is Incurred Claim Ratio, the proportion of net premiums received by an insurance provider to net claims paid out over a financial year.
The ICR provides a broad overview of the business's financial situation.
The ICR formula is-
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Annual Incurred Claim Ratio = (Net Claims Incurred / Net Premiums Collected) x 100 |
How to Calculate Incurred Claim Ratio?
The ICR is computed by dividing the total number of claims paid out by the premiums collected within a specific financial year.
But, first, let us look at an example to understand better the ICR formula utilizing the previously stated above formula.
Example
Assume that during a particular financial year, an insurance firm-
- Receives ₹10 Lakhs in Premiums and;
- Spends ₹9 Lakhs on Resolving Claims.
Then according to the formula-
ICR = (₹9 Lakhs/₹10 Lakhs) x 100
Thus, the company's ICR will be 90% for that specific year.
Importance of the Incurred Claim Ratio
The ICR may be utilized to assess an insurance company's financial standing.
A ratio like this indicates how well a health insurance provider can handle claims made against them. If the ratio is unfavourable, the company's financial health is poor. As a result, they could increase the premium, adjust the characteristics of the products and maintain stringent screening processes to get back on track.
In other words, an ICR is crucial since the ratio of health insurance incurred claims serves as a tool for evaluating the performance of the insurance provider.
It is possible to gauge how quickly health insurance settles claims submitted by covered customers by calculating the percentage of ICRs. One may decide to invest in the insurance firm in light of that.
Things to Consider While Calculating Incurred Claim Ratio
When determining a health insurance company's ICR, consider a few other criteria before purchasing coverage. These are-
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Time for Claim Settlement
It would be best to inquire about the chosen company's claim settlement time. Although the insurer has a high ICR, processing the claim could take longer than six months. A situation like that is not ideal.
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New Participants
A low denominator will result in a considerable quotient value since the incurred claim ratio is a ratio. It may be a sign of a relatively higher ICR if a new insurance provider in the market has collected fewer premiums in the early years.
On the other hand, they may have seen a lot of claims in the early years, so there is nothing to worry about.
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Insurance Product Types
A corporation that offers insurance will provide a variety of goods, including health, life, and auto insurance. The average of these will represent the overall claim ratio.
What Does Incurred Claim Ratio Indicate?
The ICR of an insurance business essentially discusses the firm's financial stability. In addition, it shows the insurer's capacity to resolve disputes.
Continue reading to learn what the various percentages about the financial stability of the health insurance business represent.
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If The ICR is More Than 100%
The insurance company is not in a favourable position in this instance.
A ratio like this indicates that the insurance firm has paid more in claim settlements than insurance premiums.
According to the figures, this is a losing scenario. The insurance business cannot continue to be in this group. To change the situation, extreme measures must be taken.
This indicates changing the product and rejecting questionable claims.
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If the ICR is Less Than 50%
A situation like that may be advantageous for the insurance provider but unproductive for the policyholders.
A lower than 50% ICR indicates that the corporation has far more premium than it has paid in claims. The claim amount must be transparently paid to policyholders.
A low ICR indicates that the policy contains many exceptions and is more expensive than average, which results in the policyholders' claims being denied.
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If the ICR is More Than 50% & Less Than 100%
This situation has the highest likelihood of being filled.
Such a scenario also benefits the health insurance business and the policyholders.
This indicates that the insurance plan is priced and provides the needed features. However, the exclusions are not overly rigid.
Policyholders regard the claim settlement procedure favorably, and there is sufficient openness. As a result, the ICR should fall between 70% and 90%.
You may also want to know the 7 Things to Keep in Mind Before Finalizing a Health Plan |
Conclusion
Several factors should be considered while selecting a health insurance provider. The percentage of incurred claims is simply one of the variables considered when evaluating a company's financial viability.
In addition, when choosing the best insurance, customers should look at the company's reputation in the industry, the time it takes to resolve claims, and other aspects.
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Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.