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How to Calculate Incurred Claim Ratio in Health Insurance?
People nowadays have plenty of options when it comes to buying health insurance for themselves and their family. To choose wisely, experts recommend comparing insurers based on different key parameters, such as the Claim Settlement Ratio (CSR), customer reviews, etc. Incurred Claim Ratio (ICR) is one such useful parameter to evaluate the performance of an insurance company. Know everything about ICR in health insurance and how to calculate it.
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- How to Calculate Incurred Claim Ratio in Health Insurance?
What is Incurred Claim Ratio in Health Insurance?
Incurred Claim Ratio, or ICR, in health insurance is the ratio of the total claims paid by the insurer to the total premiums collected in a financial year. It offers an insight into the financial stability of an insurance company and how quickly the claims will be paid. The Insurance Regulatory and Development Authority of India (IRDAI) publishes the incurred claim ratio of all general and health insurance companies in India in its annual report.
Ideally, the incurred claim ratio (ICR) of an insurance company should be from 80% to 100%. While the insurer with a lower ICR is less likely to settle claims on time, the insurer with an ICR of over 100% is more likely to be in losses.
How to Calculate Incurred Claim Ratio in Health Insurance?
The ICR of a health insurance company can be calculated by dividing the total claims received by the total premiums collected in a financial year multiplied by 100. The incurred claim ratio formula is:
Incurred Claim Ratio = (Total claims received/ Total premiums collected) x 100
For example, suppose a company earned ₹10 crore in premiums and settled a total claim of ₹9 crore in 2023. In this case, ICR = (9,00,00,000/ 10,00,00,000) x 1000 i.e. 90%. Thus, the ICR of the insurance company will be 90% in 2023.
What Does the Incurred Claim Ratio Indicate?
The incurred claim ratio of a health insurance company indicates the following:
| Incurred Claim Ratio of an Insurance Company | What It Indicates |
| If the ICR is 80% to 100% | It indicates that the insurer is financially stable and quickly settles most of the claims it receives. |
| If the ICR is less than 80% | It indicates that the insurer is not settling most of the claims it receives on time. |
| If the ICR is more than 100% | It indicates that the insurer may be in financial losses as it settles more claims than the premium it receives. |
Significance of Incurred Claim Ratio in Health Insurance
Generally, the incurred claim ratio indicates the financial health of an insurance company. An ICR of 80% to 100% is considered good for investors and existing policyholders because it shows that the insurance company is successfully settling the claims they receive. Therefore, policyholders can rely more on insurers with a good ICR.
However, an ICR above 100% indicates that the insurance company is incurring losses because the premium collected is not sufficient to pay all the claims received in a financial year. Hence, the company is probably using its reserves to pay for claims, which is not a good indicator of its financial health.
Factors to Consider While Calculating Incurred Claim Ratio
Here are some of the crucial factors to consider when calculating the ICR of a health insurance company:
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Time Taken to Settle Claims
Though ICR measures the claims settled against the premium collected, it does not consider the time taken to settle a claim. For instance, an insurer with a good ICR of 90-95% might still take 4-6 months to settle claims. This delay can result in a frustrating experience for policyholders, even if the insurer maintains a favourable ratio. Thus, a smooth and timely claim settlement process is equally important.
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Low Earnings Initially
A start-up insurer may not earn a substantial premium in the initial years of operation, but the claims settlement may be high. In such cases, the incurred claim ratio of the insurance company will be above 100% but should not be interpreted as the insurer making a loss.
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Claims Management Practices
ICR does not reflect how effectively claims are managed by the insurance company. Insurers with hassle-free and customer-friendly claim settlement processes are more likely to offer a better experience, even if their ICR is moderate compared to others.
FAQs
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Q1. How do you calculate incurred claims?
Ans: The incurred claim ratio in health insurance is calculated by dividing the total claims paid by the insurance company by the total premiums collected in a financial year. It is expressed as a percentage and helps insurers determine how stable the company is and how quickly it settles the claims received. -
Q2. What is a good incurred claim ratio?
Ans: An Incurred Claim Ratio (ICR) between 80% and 100% is generally considered good. This range shows that the insurer is using the premiums collected efficiently to timely pay the claims received. -
Q3. What is the formula for incurred ratio?
Ans: The formula for incurred claim ratio is: ICR = (total claims received/ total premiums collected) x 100. -
Q4. What is the difference between CSR and ICR?
Ans: ICR and CSR are two different parameters used to evaluate an insurance company. The incurred claim ratio shows the percentage of the total premiums collected by an insurance company that is spent on paying claims. On the other hand, the claim settlement ratio indicates the proportion of claims settled by the insurance company out of the total claims received.
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Disclaimer: The list mentioned is according to the alphabetical order of the insurance companies. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. For complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website www.irdai.gov.in
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