How to get claim settlement ratio for health insurers?

Published: January 20, 2022 at 7:00 am

Last Updated on October 2, 2023 at 9:26 am

A reader asks, “Dear sir, thank you for the helpful insights on Life Insurance Claim Settlement Ratio for FY 2020-21. Can we get similar data for health insurers?”

Life insurance claims are binary. Either insurer pays in full (one) or not (zero). So you can define a claim settlement ratio as the number of claims paid divided by the total number of claims. Also see: Claim settlement ratio is not a probability of life insurance claim acceptance!

Such a definition is impossible in health insurance because claims are not binary. A claim can be settled to any extent from 0 to 100%.

Note: None of the insurer names mentioned below or associated metrics is insurance purchase recommendations. Use the resources mentioned at the end of the article to arrive at a decision.

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It is a pity that bloggers and content creators in search of “some ratio” related to health insurance use the “claim incurred ratio” as a measure to represent the “claim playability” of a health insurer. This is rubbish.

The incurred claim ratio (ICR) is defined as net incurred claims divided by net earned premium  (net of all operating expenses, commissions etc.). This should neither be too low nor too high but how low is low and high is high are quite arbitrary.

If the ICR is low, net incurred claims  << net earned premium for a particular financial year. This means the profit margin for the insurer is high. So an investor  (in the insurance company) would prefer this.

If the ICR is high, the net incurred claims will reduce the profit margin. So an investor will not want this!

The ICR is a crude measure of the insurance company’s financial strength. It has nothing to do with the probability of an insurance company payout. A young private insurer will see violent fluctuations in its ICR from one FY to another. This is because the number of claims received and the amount paid will vary quite a bit—more on this in a separate post.

Even for established players, ICR can fluctuate wildly. Take Star Health, for instance. They have been around since 2006. Their ICR in 2019-20 was 65.91%, and in 2020-21 it increased to 94.44%. What does this tell you other than the fact their profitability was lower in 2020-21?

If I was thinking about investing in Star Health, I may think twice or dig deeper. If I am an existing customer or a potential customer, do these numbers help in any way. No, they do not.

These are the ICRs of standalone health insurers reported by IRDA in its 2020-21 report (page 171).

Aditya Birla Health Insurance49.0849.99
Care Health59.1355.15
ManipalCigna Health Insurance61.6461.13
Max Bupa Insurance53.5156.09
Reliance Health Insurance62.1745.68
Star Health and Allied Insurance65.9194.44

* HDFC ERGO Health merged with HDFC ERGO General Insurance.

Some people claim that ICR should be between 70% to 90%. So does this mean none of these insurers is “good”? Again this is rubbish. The ICR is a profitability measure and not a claim settlement-ability measure. Health insurance purchase is complicated enough. Let us not make it worse by adding worthless “metrics”.

Even if the ICR  looks stable today (across two FY) and within these precious limits, they are unlikely to stay that way after you buy!

As we had seen in the case of life insurance, market share makes a difference. The PSU insurer account for 45% of all health insurance premium collected (gross – before fees and expenses).

The standalone health insurance gross premium as a percentage of the PSU total is tabulated below. This data is also available for general insurers (towards health insurance alone), but we shall consider it in another article.

Aditya Birla Health Insurance3.4%4.5%
Care Health9.2%8.9%
ManipalCigna Health Insurance2.2%2.6%
Max Bupa Insurance4.8%6.1%
Reliance Health Insurance0.0%0.0%
Star Health and Allied Insurance26.4%32.5%

Only Star Health has a reasonable market share when compared to PSU insurers.

Can we determine how many claims health insurers reject each year?

We can only answer this question for standalone health insurers. IRDA does not provide break up details for the total claims processed by general insurers. For general insurers (including PSUs), we do not know how many of the claims were health insurance claims.

Before we look at the data, we must make an important distinction.

Claim repudiation is the refusal to honour a claim because the insurer (in their opinion) has no liability over the circumstances mentioned in the claim. The only way forward is to apply to the grievance cell of the insurer for reevaluation or to the ombudsman or the consumer court.

Claim rejection is the refusal to honour a claim because the insurer has found the application inaccurate or incomplete. Typically a resubmission is allowed.

When we colloquially refer to “claim rejection”, we only refer to repudiation.

NameClaims repudiated by Total claims outstanding in FY 2020-21
Aditya Birla Health Insurance10.1%
Care Health6.9%
ManipalCigna Health Insurance9.6%
Max Bupa Insurance9.1%
Reliance Health Insurance41.5%
Star Health and Allied Insurance15.0%

Please note that  Total claims outstanding are the sum of claims not resolved at the start of FY 2020-21 and the claims received that FY. This is not (1- claim settlement ratio) because claim acceptance does not mean 100% payout!. Even if the insurer pays 1% of the claimed amount and repudiates 99%, it will be counted as a processed claim!

Settling 85% of the claims (in full or in part) implies that Star Health lost almost all the premium collected in FY 2020-21 (ICR = 94.4%). This indicates how fragile the health insurance business is.

According to a reputed insurance intermediary, private insurers are extremely conscious about building a healthy insured pool. This is why they reject those with pre-existing diseases or completely exclude these conditions from the liability! This is why they offer “benefits” for staying fit. They want to do their best to reduce claim applications!

The problem is, even if the insurer is careful to build a healthy insured pool, a greedy intermediary can put a spoke in their plans by “encouraging” buyers to hide relevant information.

PSUs can afford to have a health ICR of 100% year after year (at least they go public), but private insurers cannot.

Was Start Health forced to reject more claims than other standalone insurers because they received more claims?

NameTotal claims outstanding in FY 2020-21
Star Health and Allied Insurance1105347
Care Health439186
ManipalCigna Health Insurance248404
Max Bupa Insurance141388
Aditya Birla Health Insurance115120
Reliance Health Insurance217

On average, it would be reasonable to expect that standalone health insurers will repudiate 10% of the claims received. Whether our claim is part of that 10% or not is impossible to tell!

In comparison, the PSUs repudiate less than 5% of all claims (health and general insurance) received (the average is 2% for FY 2020-21). Health accounts for only 35% of gross premiums collected in FY 2019-20 and 40% in FY 2020-21.

Those who hold health insurance from private players must appreciate that they will roll out the red carpet at the time of sales (since their market share is low). The buyer should not expect the same treatment at the time of claim. They have their ICRs to worry about!

Resources to buy health insurance.

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