Claim settlement ratio = the number of claims paid divided by the total number of death claims received. The Life Insurance Claim Settlement Ratio 2023 (data is from 1st April 2021 to 31st March 2022), sourced from the IRDA annual report, is tabulated below.
|Life Insurer||Claim Settlement Ratio for FY 2021-2022|
|Aditya Birla Sunlife||98.07%|
|Bharti Axa Life||99.09%|
|PNB Met Life||97.33%|
|Tata AIA Life||98.53%|
Many assume/claim that this ratio represents the probability of settlement of life insurance claims. 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 the 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 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. 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.
Some claims are rejected for the right reasons, and others for the wrong reasons. An insurer that rejects for other right reasons is still a “good” insurer!
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 of our claim being rejected is 60%. Those four claims could well be lawful rejections.
So the claim settlement data is of little use! Thankfully most insurers have a high CSR, and it is impossible to buy a policy based on this! Surely one cannot distinguish 99% CSR from 98% CSR, and we must keep in mind that it can decrease after we buy!