Calculating Incurred Claim Ratio in Health Insurance

In the wake of the recent COVID 19 crisis one thing has repeatedly come in front of humankind that everyone has started to realise now is “Health is wealth”. This old proverb which we have often heard from our elders is truer now than ever before.

People all over the world have suddenly become health conscious and started developing healthy habits like planned and controlled diet and routine exercises and yoga classes to increase their immunity against deadly diseases and viruses.

In addition to that people have now started thinking more seriously about purchasing and renewing their health insurance to cope up with the ever rising medical and health care costs. In the recent times we have heard that how the treatment costs in private hospitals were abnormally high due to higher demand and lesser supply.

People realise this fact that how much a health insurance is needed at the time of a health crisis and how it can save eroding the lifetime savings of an individual in case of an unplanned and sudden hospitalization is required of any family members. In that case a health insurance is a true friend as we often hear a friend in need is a friend indeed.

Health insurance in Indian insurance market has not only grown rapidly in past decade but also by showing consistent and sustainable growth has become the number two contributor in non-life insurance segment after motor insurance which itself signifies the awareness level public is having towards health insurance.

As per the current situation and environment globally we can say for sure that the number of lives and families covered in one or other form of health insurance is set to increase in coming time. In India employer provided group health insurance is also a way people enjoy the coverage under the protection umbrella of a health insurance.

These group health policies cover either the whole family including parents/ parent in laws under a single floater sum insured or may also offer individual sum insured to all family members. If the cover provided by employer seems insufficient people also purchase individual/floater policies.

It is also helpful to run a separate policy as after retirement no employer provided coverage is available. It is imperative for self-employed businessmen or professionals to purchase a health insurance from market as per their choice and convenience.

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Now after setting the context and explaining the some basic tenets of health insurance and current situation of the same let us move to some the technical aspects as the title of our article suggest.

In most basic terms, Claim ratio in any form of insurance is claims divided by premium. Now if this ratio is more than 1 then it means claims have overpowered the premiums paid under the policy and insurer is undergoing a loss by writing the proposal.

Going a step further, claim ratio can be calculated at a portfolio level if the insurance company is interested in knowing say what is the claim ratio is running for the particular line of business. Words cannot picturize the scenario completely so let us understand the same by the help on an example.

Let us say ABC Health Insurance Company writes 2000 health insurance policies in the financial year with a premium collected 5 Crore rupees and settled claims of 7.5 Crore rupees in the same period. Say some professional of the company want to calculate the claims ratio as on date. Now this can be done in different ways and we will surely shed some light on this in the paragraph below.

If we simply divide claims paid or settled by the premiums collected to get a percentage figure this will be our incurred claims ratio. In the example taken the incurred claims ratio will be 150%. This straight way means the health insurance company has paid more 50 percent more claims than the premium collected in the financial year and the company is running in losses as far as this particular portfolio is concerned.

Now say if the company has paid only 2.5 Crores in claims. In that case the claim ratio will be 50% which indicates the profitability of the insurer. But the story does not end here, as there are other legitimate ways of calculating claims ratio.

Now say the same insurance professional wants to check the profitability of the portfolio midway in the financial year i.e. month of January 31st. He will have the figure of the claims reported till then but then he also needs to consider the claims which are incurred but not reported. This is termed as IBNR in insurance parlance.

The professional will thus try to annualize the claims seeing the past claim experience of the portfolio. In undergoing this process he will approximate the future claims by seeing the past claims and then try to find out the claims ratio to determine the overall profitability.

There are other ratios as well calculated by the insurer to determine and check the overall health of the portfolio or the company as a whole. Claim ratio is obviously an important one because claim is the major outgo for an insurer income being the premium collected. Keeping a continuous watch and check on the claims ratio will always warn the insurer to apply suitable risk management if things are going out of hand.


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