How do you know the industry is charging you more than it should? In insurance, one of the yardsticks is the claims ratio, which is the ratio of claims paid to premiums received. A ratio of over 100 means the company is paying more claims than it is receiving premiums and vice-versa. The claims ratio for the public sector is over 100%, about 84% for the private sector and about 58% for standalone insurers, as per Irdai’s annual report for FY17. We ask experts whether this indicates overcharging by insurers?
Not okay to look at claims ratio alone
Overall loss ratio of a health insurance company is the sum of the claims ratio and the expense ratio. Both are dependent on aspects including mix of business, portfolio size, demographic profile, tenor, persistency, claims management, fraud management, tariff management with network hospitals, pricing revision duration of various products, among others.
Hence, it may not be appropriate to look at claims ratios alone. Typically, in the initial years of a health insurance company, expense ratio is higher than the claims ratio and as the company matures, the reverse happens.
The reasons why standalone health insurance companies have lower claims ratio as compared to general insurance and public sector insurers are tenure of the business, better underwriting and claims management.
Also, general insurance companies have been in the market for a longer duration and have more mature portfolios, where the effect of waiting periods would have worn off at the portfolio level. I believe, loss ratio of more than 100% is not good for customers since such a business may not be viable in the long term leading to increase in the premium.
—Mayank Bathwal, CEO, Aditya Birla Health Insurance Co. Ltd
Claims settlement rate main metric
Comparing the overall claims ratio across insurers can be misleading because it combines retail and corporate claims. A proper analysis would be to compare retail claim ratios across insurers, but this information is not available in the public domain.
From a customer’s perspective, the main metric to look at is claim settlement rate. It measures the percentage of total claims that are settled. It indicates the probability of a customer’s claim being paid. Unfortunately, this information is also not available separately for the retail business.
If both claim ratio and claim settlement rate are low, then there is a customer issue. If claim settlement is high but claim ratio is low, it suggests that non-claim costs are a large part of pricing. This could be because of intense competition resulting in high customer acquisition and renewal costs that get built into the premium, but is not reflected in claims paid.
Buyers should focus on claim settlement and the industry needs to share more detailed data so that customers can make informed choices.
—Kapil Mehta, co-founder, SecureNow.in
Tightening cost can improve claims ratio
Pricing is liberal in group insurance as they are based on volume and also due to higher discounts offered based on the client’s total insurance account. Insurers also “buy” this portfolio to increase their topline. This has resulted in high claims ratio in the segment (currently, more than 100%). Prices are more stable in individual portfolios. Individual policies are better priced and more in line with medical inflation. Premiums are based on factors like health condition, family medical history and pre-existing conditions. Claims ratio depends on control on claim costs like uniform treatment or procedure costs in hospitals and underwriting discipline. If you manage the selection of risks and tighten costs in the healthcare ecosystem, you can have a good claims ratio. So, a lower claims ratio doesn’t mean premiums are overpriced as you are operating in a competitive market. To keep premiums sustainable, it’s important to standardise treatment cost across hospitals. Regulatory intervention will help insurers tackle pricing dilemma.
—Warendra Sinha, MD and CEO of IFFCO Tokio General Insurance Co. Ltd
Retail customers bearing the burden
The health insurance segment of the non-life sector has been growing at a healthy rate of 20% over 10 years. The overall portfolio comprises three customer segments: retail, group and government mass business that’s underwritten by three sets of insurers: public, private non-life insurers and standalone insurers. Retail customers and standalone health insurers (that largely do retail policies) have registered the lowest claims ratio (premium received is much higher than claims paid), indicating that retail customers are being made to bear the burden of bleeding portfolio of group and government businesses that are not priced appropriately.
While a higher claims ratio indicates unsound underwriting, inadequate pricing, poor management of risk and inefficiencies in claims management, a low loss ratio like 58% in the case of standalone insurers indicates selective underwriting practices and elements of over pricing.
Also, the health segment generates the second highest number of grievances for the industry. I think it’s only a matter of time before we start debating the acceptable minimum claims ratio if health insurance premium is to remain fair and reasonable.
—Malti Jaswal, senior consultant, World Bank, and consultant, Ayushman Bharat