# Claim settlement ratio is not a probability of life insurance claim acceptance!

Published: December 7, 2020 at 4:10 pm

Last Updated on December 7, 2020 at 4:10 pm

The claim settlement ratio is the number of death claims settled divided by the total number of death claims received. Many people assume/claim that this ratio represents the probability of life insurance claim settlement. Here is why this is incorrect.

Take the case of dice used in gambling. A single die is a cube with six numbered sides. If you want the die to show a six when you throw, the probability is 1/6. The formula is the number of desired results (1) divided by total possible results (6).

This looks quite similar to the claim settlement ratio, but there is one big difference which many of us fail to realise. The probability of 1/6 assumes each of the six throws is identical without any bias, and the die is uniform with no defects on any side.

This is the key to ascribing a ratio of two numbers as a probability or not. Each try should be identical. Immediately it should be clear that this is not the case for life insurance claims. Each claim is distinctly different.

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The total number of claim applications received would include honest and dishonest claims. It is well known that insurance agents encourage clients to hide facts to close the sale. Among the dishonest claims, there would be several nuances. E.g. an undeclared smoker dying of cancer; an undeclared diabetic dying of a road accident etc. Some could be approved wrongfully!

Among the honest claims, some may need more investigation than others, and some could even be rejected wrongfully. You only need to spend some time looking at the ombudsman casefile to appreciate this: No insurer will hand life insurance claim amount on a platter!

The point is, each claim cannot be compared to the other. Just because an insurer has rejected four out of ten claims does not mean the probability our claim being rejected is 60%. Those four claims could well be lawful rejections.

When each time you roll the die, everything changes from the die to the conditions to the person who throws, the probability of getting a “6” is not 1/6. The probability then is unknown.

Thankfully as the insurers market share increases, the claim settlement ratio tends to increase, and today, one cannot distinguish one company from the other! These are the 2018-19 claim settlement ratios of life insurers as per IRDA: 99.07%, 99.04%, 98.74%, 98.58%,  97.79%,  97.71%, 97.40%,  97.28%, 97.15%, 97.03%, 96.80%,  96.74%,  96.64%, 96.45%, 96.21%, 96.06%. They are all practically the same! The full data is here: Claim settlement ratio 2018-19 for term insurance.

• Claim Settlement ratio is just a ratio. All probabilities are ratios, but all ratios are not probabilities!
• Did you know the claim settlement ratio (CSR) does not apply to health insurance?! This is because death claims are binary, while health claims can be partially settled. Beware of health insurance sales guys and irresponsible bloggers who talked about CSR for health insurance.
• Claim incurred ratio (claim amount settled divided by premium collected) of health insurers has nothing to do with claim settlement and is of little use in choosing insurance. It is also not a probability!

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(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. He has over ten years of experience publishing news analysis, research and financial product development. Connect with him via or Pattabiraman has co-authored three print books: (1) You can be rich too with goal-based investing (CNBC TV18) for DIY investors. (2) Gamechanger for young earners. (3) Chinchu Gets a Superpower! for kids. He has also written seven other free e-books on various money management topics. He is a patron and co-founder of “” an organisation promoting unbiased, commission-free investment advice.
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