Wednesday, June 29, 2022

How to Calculate Incurred Claim Ratio in Health Insurance?

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Travon Marner
Travon Marner
Travon Marner is a seasoned journalist with nearly 12 years under his belt. While studying journalism at Boston, Travon found a passion for finding local stories. As a contributor to Business News Ledger, Travon mostly covers human interest pieces.

Policyholders are spoiled with new and improved features and benefits in health insurance policies. However, there are specific parameters for comparing different insurance providers and the policies they provide. Incurred Claim Ratio is one such parameter that determines the performance of an insurance provider. It is defined as the ratio of the net claims settled to net premiums collected by an insurer. Keep reading to know how it is calculated and learn about other related facts.

How to Compute Incurred Claim Ratio?

You can calculate Incurred Claim Ratio using the following formula –

Incurred Claim Ratio = net claims incurred / net premiums collected

Here’s a simple example to understand this formula –

Suppose an insurance company XYZ earned Rs. 10 lakhs and settled insurance claims of Rs. 9 lakhs in 2021. Then, the ICR in 2021 for this insurance provider will be 90%.

What Is the Significance of ICR in Health Insurance?

A higher ICR is excellent for policyholders as it suggests that an insurance provider successfully settles insurance claims. Hence, you can choose an insurer with a higher ICR to purchase a health insurance policy.

A higher Incurred Claim Ratio denotes loss for insurance providers. Taking a cue from the previous example, the Incurred Claim Ration of an insurance provider in 2021 was 90%. This means that an insurance company collected 90% of premiums and spent that amount on settling insurance claims. The remaining 10% is its profit margin.

If ICR rises to 95%, it will lower this insurance company’s profit margin from 10%-5%. Further, a more than 100% ratio implies that the insurance provider is facing a loss in revenue. This means that the premium collected by the insurance provider is inadequate to meet insurance claims, and it is using its funds to settle the same.

What Are the Things to Consider Besides Incurred Claim Ratio?

Though ICR is an essential yardstick to assess how an insurance provider is performing, it does not provide a broader perspective. Here are a few things you must consider:

● Time taken for claim settlement

You must consider the time requried for an insurance provider to settle a claim. Thus, an insurance provider may have an optimum ICR, but it takes around 4 to 6 months to settle an insurance claim, which is undesirable for any policyholder.

On that note, you can find reliable insurance providers online. Review and compare different insurance providers on these platforms and select a health insurance plan that suits your requirement. Besides, you can also use a health insurance premium calculator available on these online platforms to know how much premium you need to bear for availing a health insurance policy.

● Initial earnings are low

An insurance start-up may not earn an adequate premium in the early phases of its operation and may receive a higher proportion of insurance claims. This will lead to an increase the ICR. This must not be interpreted as loss for the company because it is inevitable that it will face an increased claim incidence in the initial years.

Thus, Incurred Claim Ratio is not the absolute parameter for choosing an insurance provider for your health insurance plan. You must consider other criteria such as claim settlement time, benefits and terms and conditions of an insurance policy before investing in it.

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