You want to buy a term life insurance plan. How would you select a life insurance company? You would want to go with the “Best Life Insurance Company”. Wouldn’t you?
And for that, most of us would look at the claim settlement ratio of the various insurers. Higher the better. IRDA recently released the annual report for FY2020-2021, where it shared the claims settlement data for all the life insurance companies in India. This makes your task quite easy, doesn’t it? That’s right but you need to focus on the right claim settlement ratio too. Let’s first understand what claim settlement ratio means.
Claim Settlement Ratio by Number
This is the number usually highlighted by the life insurance companies. You can expect numbers closer to 98-99%. What does this number mean?
If the life insurance company receives 1000 death claims in a year and it pays 990 of those claims, the claim settlement ratio is 990/1,000 = 99%.
As simple as that. Clearly, higher the claim settlement ratio (by number), the better it is.
Claim Settlement Amount by Benefit Amount
Statistics often hide more than they reveal. What if the insurance company is rejecting death claims in term insurance policies more? As a prospective term insurance buyer, does this not interest you? It should.
Let’s say, of the 1000 claims, 950 claims were from traditional life insurance plans or ULIPs with an average claim amount of Rs 5 lacs.
Only 50 claims were from term life policies with an average claim amount of Rs 1 crores. For the sake of simplicity, let’s consider all policies were of Rs 1 crore.
The life insurer settles all the 950 claims under traditional plans and ULIPs. And rejects 10 out of 50 claims in term insurance plans.
The claim settlement ratio by number is still 99%. The insurance company paid 990 out of 1000 claims.
But 20% of term life insurance claims were rejected. You wouldn’t be keen on such a company, right?
Clearly, you would go with a company where death claim settlement is higher for term life insurance policies. But there is a problem. Such data is NOT available.
IRDA (or the insurance companies) does not provide policy category-wise for claim settlement data i.e. you can’t figure out whether term insurance plans face higher rate of rejections. The data is shared only on consolidated basis (for all types of life insurance policies). Now, you know that claim settlement numbers reported by life insurance companies are not reliable. At the same time, you don’t know anything about claim settlement rates for term life insurance plans. What can you do? Fortunately, you have a proxy. IRDA reports claim settlement data by benefit amount too.
For instance, the IRDA annual report shares the total amount of claims received, amount of claims, rejected and pending. Using this, we can find out the claim settlement by benefit amount.
Continuing with the above example:
1000 death claims received.
950 claims under traditional plans or ULIPs: Average claim of Rs 5 lacs. All settled.
50 claims under term life insurance plans: Rs 1 crore each. 40 settled. 10 rejected.
Total amount of claims = 950 X 5 lacs + 50 X 1 crore = Rs 97.5 crores
Total amount of claims settled = 950 X 5 + 40 X 1 crore = 87.5 crores
Now, 87.5 crores and 97.5 crores are mentioned in the IRDA report (not policy category wise settlements)
Claim settlement ratio by benefit amount = 87.5 crores/ 97.5 crores = 89.7%
This is quite removed from 99% reported when looking at settlement by number.
If you are looking to buy a term life insurance plan, focus on both the numbers.
- Claim settlement ratio by number of claims
- Claim settlement ratio by benefit amount
You would want the insurance companies to rank well on both the parameters. Let’s see how various insurance companies fare.
|Life Insurers||Claims Received||Claim Settlement By Number||Claim Settlement By Amount|
|No. of Claims||Amount (Rs. Crores)|
|Star Union Dai-ichi||1,635||78||96.0%||92.78%|
|Canara HSBC OBC||1,899||169||97.1%||92.61%|
|Aditya Birla Sun Life||6,474||473||98.0%||93.15%|
I have sorted the data based on the number of claims received. In the table below, I share the average size of settled and rejected claims.
|Life Insurance Companies||Average Size of Settled Claim (lacs)||Average Size of Rejected Claim (lacs)|
|Aditya Birla Sun Life||6.9||24.8|
|Canara HSBC OBC||8.5||22.0|
|Star Union Dai-ichi||4.6||7.9|
You can see the average size of rejected claims is much bigger than the average settled claim. This tells that higher value policies such as term life insurance plans are more likely to be rejected.
Unless you have preference for any life insurance company or brand, you should go with a company that ranks well on both claim settlement ratios. 98% or above in the claim settlement by number. 95%(or at least 90%) or above in the claim settlement ratio by benefit.
Why the Claim Settlement under Term Life Insurance Policies Is Lower?
Term insurance policies are usually high value policies and the pay-out from an insurer’s pocket is much higher in case of a term life insurance plan. Hence, they are likely to investigate term plan claims deeply. That itself increases the chances of rejection (due to non-disclosure, frauds etc).
By the way, we can’t just put the blame of higher claim rejections in term plans on life insurance companies. If the customers have an intention of misleading insurance companies, they are likely to purchase term insurance plans. And this would make life insurance companies investigate term life insurance claims deeply.
Then, should we give the benefit of doubt to the insurers with low claim settlement by benefit amounts? After all, the insurance companies are completely entitled to reject insurance claims on grounds of non-disclosure of material information and frauds. I don’t think so, especially if this trend has continued for many years. This is for 2 reasons.
- It is unreasonable to assume that the customers are lying to or hiding information from only a few insurance companies. Hence, insurers with low claim settlement by amount cannot hide behind the excuse of fraudulent intentions of customers.
- A lower settlement by benefit amount suggests mis-selling on the part of insurance companies or their agents. Higher mis-selling would lead to higher rejections. I am aware of many instances where insurance company tele-executives encouraged buyers not to disclose health conditions.
- This reflects on the claim settlement culture of the companies.
Section 45 of the Insurance Act 2015 Provides Protection
If your life insurance policy is over 3 years old, your life insurance claim cannot be rejected. Since this is mentioned in the Act passed by the Parliament of India, the insurance companies have little leeway in this. The insurance companies must pay death claims for life insurance policies over 3 years.
However, do not take this as an excuse for hiding aspects about your health for 2 reasons.
- Demise can happen before completion of 3 years (and the insurance company can easily reject a claim for non-disclosure of material information).
- Even if demise happens after 3 years, insurance companies can find some loophole and reject claims. Your family can go to IRDA but the insurance regulator is quite effete and useless. Your family will have to go to courts and we know that can be inconvenient.
You must remember you won’t be around to challenge insurer’s claims about non-disclosure or fraud. Your family will face the brunt. The recorded lines are only accessible to the insurance companies. How does your family contest what you disclosed or didn’t disclose on recorded lines? That’s why it is important to not just to disclose your health conditions at the time of policy purchase but also to ensure that such information is considered by the underwriting teams.
If you share any medical information on “recorded lines”, do share the same information with the insurance company over an email too. Mark a copy to a family member too.