Six factors to know when buying an insurance plan


As a policyholder, you want to be sure about the safety of your money when you plan to put it in a policy. You invest in insurance policies because you want to be prepared for the unannounced and unexpected losses caused due to events like death, critical illness, etc. Hence, it becomes utmost important to evaluate a life insurance plan before investing your hard-earned money.

You need to check whether the company is able to function consistently or not and does it have a good “claim settlement ratio” or not. “Claim Settlement Ratio” is the most important factor while deciding whether the insurance company is worthy to invest or not, because if the company does not settle the claim on time, there is no point of buying the best life insurance plans from the said company.

Following ratios will give you a comprehensive view of the insurance company you’ve chosen which will eventually help you evaluating the company based on the shared ratios:


Solvency Ratio:

Solvency Ratio of a company helps in deciding whether a company is sufficient to manage all the claims in extreme scenarios such as earthquake, flood, etc. As per IRDAI guidelines, insurance companies have to maintain a solvency ratio of 150% to minimise the chances of bankruptcy in extreme scenarios. In other words, Solvency Ratio shows the amount by which the insurer’s assets exceed its liability and hence, it helps the insured to evaluate if the particular insurance company is financial capable of meeting extreme situations or not.  It’s advisable to opt for the companies that have been able to maintain a good Solvency Ratio over the last consecutive years.


Persistency Ratio:

This certain ratio helps you check if the company is able to preserve its customers or not. In other words, Persistency Ratio helps to check if the company is able to keep its customers persistent in renewing their investments in the company or not. Higher the persistency ratio, the better the company is, as it shows that the customers are not apprehensive about putting their investments again and again in the particular company.


Claim Settlement Ratio (CSR):

CSR of an insurance company gives you an idea about total number of claims settled by the company against the total number of claims received by it. Higher the Claim Settlement Ratio (CSR), greater are the chances of your claim being settled by the company. This criterion is also used to measure the reputation of the insurance company. Talking about different companies, Life Insurance Corporation of India (LIC) has the best reputation in the terms of CSR (with 98.33%).


Incurred Claims Ratio (ICR)

ICR shows the total value of claims settled by the company against the total premium received in a particular financial year. ICR less than 50% is not a good sign as it indicates that the company is charging higher premium for its life insurance products, but is providing limited coverage with lower claim payments and has listed many exclusions. Similarly, ICR greater than 100% is also not a healthy sign as it shows that the company is disbursing more money when compared to the collected premium. As per the experts, an ideal ICR should range in between 75% – 90%.


Commission Expense Ratio (CER)

CER indicates the commissions paid by an insurance company for a particular premium in a particular period. It’s better to keep a tab on this ratio as after a certain limit, the higher the CER will go, the lower you will be offered the discount (which means the higher premium paid).  Although, lower CER is a good sign but you need to keep an eye on negative commission expense ratio as it’s again not a healthy sign as it could mean the particular company with negative CER is not paying commissions for different products such as mass health schemes and crop insurance.


Combined Ratio

It’s always a good decision to go for the insurance companies with lower combined ratio as it implies that the losses/expenses of the particular company are lesser when compared to its premium revenue for the specific time period. Going for the companies with combined ratio greater than 100% isn’t a wise decision as it means that the company has a greater cash outflow than the total premium earned (not shows a good financial condition for the company).


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