Most people ask about returns, guaranteed or otherwise, premiums, tax breaks (not necessarily in this order) before buying a life insurance cover. Since for many the main purpose of buying life insurance cover during the first three months of every year is an exercise in tax planning, it fits the bill in that context.
Rarely do people actually bother to ask whether the insurance company can be trusted to honour a claim. Ironically, this is the most important aspect of an insurance product. In fact, that is the chief function of a life insurance policy – offering financial protection to the dependents of the policyholder on his or her death.
Understanding the claim track record
To be fair, very few know the parameter to be used to ascertain the company's dependability when it comes to approving claims. And, it is very unlikely that your agent will volunteer to share this information, unless his company has an outstanding track record of settling claims.
So, how do you get your hands around this key determinant? Well, for starters, you can refer to the Insurance Regulatory and Development Authority's ( Irda) Annual Report for 2010-11, which was released recently and put up on its website. Every year, the report lists claim settlement, repudiation (rejection) and pending ratios for all life insurers.
While a thorough research would necessitate studying these ratios for a longer period, even a year's data is not bad to begin with. The data sheet may look complicated, but all you have to do is focus on the percentages mentioned in brackets for each company. For instance, LIC's claim settlement ratio is over 97%.
"Claim settlement is an important criterion for all insurance covers, be it a term plan, traditional plan or Ulip, as insurance is the primary consideration," says Aditya Apte, partner with financial planning firm The Tipping Point.
LIC's record can be said to be very good, especially since the public sector giant processed over 7 lakh claims during the year. Some private sector companies, in contrast, have a dismal ratio of around 50%, despite handling just a few hundred claims.
The sole criterion?
Prima facie, the simplest way to choose a policy seems to be to buy one from the company that has the best, or at least very high, claim settlement ratio. However, it may not be entirely correct to go blindly by this data point alone.
"While the claim settlement track record would be an important factor when buying a life insurance policy, it would not be advisable to rely solely on this. Some of the new entrants in the insurance industry were initially prompt in settling the claims to establish a good record to capture business. But after having established themselves in the market, they have become worse than the established public sector company," says consumer activist Jehangir Gai.
For functioning effectively and surviving over a period of time despite heavy claims, a company must have a broad capital base with sound liquidity and reinsurance, he feels.
"Else, a company which may otherwise have a good claims settlement ratio could turn bankrupt in the event of a natural disaster," he adds. In addition, you need to probe further to get information on the death claims handed out.
"While computing the data on claims settled, pay-out of maturity proceeds is also treated as claim paid. In a way, this helps older companies to clock a better ratio as they are likely to see more maturities every year. Therefore, if you are buying a regular or online term policy, you should ask for claim information specific to these categories in order to get the correct picture," says Sanjiv Bajaj, managing director, Bajaj Capital.
Go deeper than mere numbers
Then, of course, there are other parameters that pertain to the policyholders themselves that are to be considered. For instance, comprehensiveness of the cover, its cost-effectiveness and, if it features an investment component, the returns track record too.
"While buying a policy, try to keep it simple and cover all the possible event risks (such as critical illness) along with life cover. Keeping your life insurance separate from your investment plans is an important consideration. Term plans offer the simplest protection possible at the cheapest cost," advises Apte.
An 'acceptable' ratio
Now, it is quite possible that upon research, you find that the company with the best claim settlement history does not offer a product that suits your needs. Or, that the premiums charged simply do not fit into your budget.
In this scenario, can an insurance seeker look for a company with a claim settlement ratio of say over 80%? Or should 90% be the minimum threshold level for the purpose? "For any company older than three years, one should look for an acceptance ratio of a minimum 90%," suggests Kalpana Sampat, chief, branch operations, underwriting and claims, ICICI Prudential Life.
"This is extremely subjective and relative. A high claim settlement ratio is important, and the higher the better from the perspective of the insured as you are effectively buying insurance to protect your family," says Apte. The key, then, may be to strike a balance and look for the best possible alternative.
This apart, there is a view that younger companies are entitled to some leeway as claims arising out of policies less than two-years old typically invite investigation and hence a high claim repudiation ratio is to be condoned. Gai, however, refutes this argument.
"The law of insurance states that investigation is necessary only in respect of claims lodged within two years of having taken the policy. Unless the claim is absolutely fraudulent due to suppression of material facts, which is unlikely as a medical check-up is a must for taking life insurance, the claim would be payable," he says.
"There would be legitimate claims in circumstances like death due to road accident. However, the number of claims would be relatively lower for a new/younger company, so it ought to have a better claim settlement ratio."
Factor in claims pending ratio
In addition to the claim settlement and repudiation ratios, claim pending ratio is also to be taken into account. The figure is arrived at after deducting claims settled, written back as well as rejected from the total claims filed.
"A pending ratio of over 5% demonstrates an inefficient claims management process. A company with a low repudiation but high pending ratio could be seen as postponing decisions on investigation related cases. One needs to study the 'turn around time' (TAT) on the pending data if the percentage seems high," adds Sampat.
Also, the company's age could be more pertinent here than on the claim rejection front. "Typically, a new company would have a higher claim pending ratio as almost all the policies would be new and would thus require investigation to prevent frauds," says Apte of The Tipping Point.
In short, you would do well to adopt a holistic approach and examine all criteria before taking a final decision.
Source: Economic Times
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January 19, 2012