Health insurance is an essential aspect of an individual's financial planning. It helps mitigate the financial burden of unexpected medical expenses, which can be quite high today. Moreover, with the rising cost of healthcare, individuals must have adequate health insurance coverage. One of the key metrics used to evaluate the performance of a health insurance company is the Incurred Claims Ratio (ICR). In this article, we will delve deeper into the concept of Incurred Claims Ratio, how it is calculated, and its significance in the Indian market.
What is the Incurred Claims Ratio?
The Incurred Claims Ratio (ICR) measures the claims paid out by the insurance company as a percentage of the premium collected. It is calculated by dividing the total incurred claims (the amount paid out by the insurance company to cover medical expenses) by the total premium collected. The result is then expressed as a percentage. In simple terms, ICR represents the percentage of premiums that the insurance company has paid out as claims during a financial year.
For example, if a company collects a premium of Rs. 100 and pays out Rs. 50 in claims, the ICR would be 50%. The insurance company pays out 50% of the premium collected as claims. A high ICR is indicative of the fact that the company is paying out more claims than it collects in premiums, while a low ICR indicates that the company is making a profit.
How to Calculate Incurred Claims Ratio?
The formula for calculating (ICR) incurred claims ratio is as follows:
ICR = (Total Incurred Claims / Total Premium Collected) x 100
It is important to note that the ICR is calculated on a financial year basis. It is also important to note that the ICR is calculated for the entire company, not individual policies. This means that the claims made by all policyholders are taken into consideration when calculating the ICR.
What is the Utility of Incurred Claims Ratio?
The Incurred Claims Ratio (ICR) is a crucial indicator of the financial stability of a health insurance company. It helps to determine the company's ability to pay claims and its level of profitability. There can be three main scenarios when you calculate an incurred claims ratio:
100% ICR: If the ICR is 100%, it means that the insurance company is paying out all the premium collected as claims. This is not desirable as it indicates that the company is not making any profits. It could also mean that the company is not pricing its policies correctly or managing its claims efficiently.
ICR Below 50%: If the ICR is below 50%, the insurance company is not paying out as many claims as it is collecting in premiums. This indicates that the company is making a profit and has a healthy financial position. It also suggests that the company is pricing its policies correctly and managing its claims efficiently.
ICR Between 50% - 100%: If the ICR is between 50% - 100%, it means that the company is paying out almost as much as it is collecting in premiums. This indicates that the company is operating at a break-even point. It may suggest that the company is pricing its policies correctly but not managing its claims efficiently.
In the Indian market, the ICR of a health insurance company is an important metric for evaluating its performance. The Insurance Regulatory and Development Authority of India (IRDAI) has set a minimum ICR of 75% for general insurance companies, which means that the company must pay out at least 75% of the premium collected as claims. This is done to ensure that the insurance company provides adequate coverage to policyholders and does not make excessive profits. Policyholders can use the ICR as a benchmark to compare the performance of different health insurance companies before purchasing a policy.
Conclusion:
In conclusion, the Incurred Claims Ratio is an important metric for evaluating the performance of a health insurance plan company. A high ICR (incurred claim ratio) indicates that the company is paying out more claims than it is collecting in premiums, while a low ICR indicates that the company is making a profit. In the Indian market, the ICR of a health insurance company is regulated by the IRDAI, which has set a minimum ICR of 75% to ensure that policyholders get adequate coverage. Understanding the ICR is important for policyholders to make informed decisions while purchasing health insurance. However, policyholders should also consider other factors, such as the company's reputation, claim settlement ratio, and the type of coverage offered, before making a decision.