Most of us check out claims ratio of insurance companies in India when we want to buy term insurance. Not a bad thing. But it this indicator really reliable for buying a term insurance plan? Let’s find out.
Claims Ratio is declared by the regulator IRDA at an aggregate level, i.e. as a total ratio of all kinds of policies put together for a particular company.
So for a company X, the claims ratio is calculated as…
- the total no. of death claims paid for its endowment policies, money-back policies, whole-life policies, children’s policies and term insurance policies
divided by
- the total no. of death claims received for all these types of policies.
Now please understand that except term insurance, all other type of life insurance are mainly savings products with some insurance built in. The death claim values are small in nature for savings plans and there are hardly any frauds because if someone indeed wanted to fraud the insurance company (which is a big reason for claims rejection), they would buy term insurance because it gives high life insurance cover with very low premium. So the death claims ratio of savings plan customers is generally very high for all companies alike.
Look at the table below. If company X has high sales of savings products, they will have high no. of death claims from customers of savings products. Then its overall claims ratio will be very high even if it rejects most of its term insurance death claims. On the other hand, if a company sells mainly term products and lesser saving products, the overall claims ratio will depend on its term insurance death claims approvals.
So the total claims ratio will swing in the direction of the whichever product the company sells more of. This is explained below.
For company X, the total claims ratio is 97% and that looks really good. But when you go deeper into the number, you will realize that the claims approval for Term Insurance alone is just 40%. The company sells a lot of savings plans and so has lot of death claims in those products. Since most savings plans death claims are passed, the overall claims ratio looks very high.
Now look at Company Y. The total claims ratio is just 71%. But the claims ratio for term insurance alone is 63%, much higher than company X!
Now tell me which company will you choose when you are buying term insurance – X or Y?
I would choose Y, and I am sure you would as well. But we have a problem. The break-up of claims ratio between savings products and term products is not available anywhere! Till then all we can do is use the overall death claims ratio, which need not necessarily be a good indicator when deciding on our a term insurance plan, like you saw in the example above.
Given the rapidly increasing no. of Indians buying online term insurance, it is just a matter of time when our insurance regulator IRDA will start publishing product-wise claims details.
All this however should not stop you from buying a term insurance plan. There is no doubt that if you are a bread-winner and have at least one dependent, it is the best product that you can ever buy! But do your research well. Don’t just look at price and claims ratio, compare term insurance plans of all companies in India based on these 5 parameters.