Understanding numbers in claim settlement

While LIC has a better settlement ratio than that of private players, it is not the only parameter to go by

It is a tough one for prospective buyers of life insurance policies. While the Insurance Regulatory and Development Authority of India (Irdai)’s annual report of 2014-15 reveals Life Insurance Corporation of India (LIC) has the best claim settlement ratio — a crucial parameter while buying life insurance — is it the only number one should go by?

LIC’s claim settlement at 98.19 per cent is better than the entire private sector’s 89.40 per cent. The insurance behemoth rejects only 1.15 per cent claims compared with the private sector’s 7.78 per cent. In actual numbers, the rejections will be much higher because of LIC’s sheer size. LIC sold 12 million policies in the first nine months of 2014-15, while the entire sector sold 16 million policies.

Investment advisor Harsh Roongta believes claim settlement is a good starting points as it helps weed out companies with bad settlement ratio. “Most claims are made in the initial years, leading to investigation from all insurers because of the premature nature of the claim. If Irdai gives claim settlement numbers of this initial period, the entire sector is likely to be on a similar footing.”

According to Irdai’s latest guidelines, claims cannot be rejected for any reason after three years of the policy. “Another reason for rejections from private sector players would be due to higher sum assured. Today, there are term policies of Rs 2 crore and above. In LIC’s case, the sum assured amounts will be much smaller,” Roongta adds. According to Amitabh Chaudhury, managing director and CEO of HDFC Life, LIC does better on claims due to the huge database of customers and distributors that give them an edge while verifying the authenticity of claims. The private sector is still building up this database.

Another reason is the private sector has more innovate products and can become victims of fraud more easily, leading to higher claims rejection. Irdai’s report has another interesting number — duration-wise pending claims. In this, private sector scores. While 76 per cent claims are pending for three months, it declines to 11.41 per cent for claims pending over a year.

For LIC, the latter number is at 30.09 per cent. “In case of private players, cases get settled or rejected within six months because these players are more nimble,” says an insurer who did not wish to be named. Prospective policyholders should also be looking at other parameters such as servicing and pricing as well. “If I am a healthy person who wants a good term policy, I will only go for the cheapest product with decent features,” adds Roongta.