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Performance Indicators of Insurance Companies
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In our previous blog, we have discussed the insurance premiums and its different types.

Let us now understand some performance indicators of insurance companies which one should consider before purchasing an insurance policy.

If you are planning to buy an insurance policy challenge is to find the right insurance company. Nowadays, people buy policy under third person influence or merely looking up the primary financials of the companies. Following are some of the indicators which will help you to analyze the performance of the insurance company and take the decision:

1. Persistency Ratio: This ratio helps to understand how persistent policyholders have been renewing their policies every year. So if the percentage for the given year is 60% then out of the total 100 written policies only 60 policyholders got their policies renewed. It is disclosed by insures in various intervals – 13th month, 25th month, 37th month, 49th month and 61st month.

It is calculated as:

 Number of policyholders paying premium *100   
Net active policyholders

 This means that higher the persistency ratio, higher will be the loyalty of the customers towards the respective insurance company and vice versa.

2. Solvency Ratio: This ratio helps to understand company’s ability to settle claims in extreme situations. It is a good indicator for company’s financial capacity to meet its short-term and long-term obligations. According to the IRDAI norms, all companies have to maintain a solvency ratio of 150% for minimizing bankruptcy risk. It is calculated as:

           Available Solveny Margin *100   
Required Solvency Margin

Where,

Available Solvency Margin (ASM) is the value of company’s assets over liabilities and Required Solvency Margin (RSM) is the net premium written by the company.

Higher the solvency ratio, higher chances of claims getting paid. This ratio is also used by potential lenders when evaluating the credit worthiness.

3. Combined Ratio: It indicates company’s total outflows in terms of commission paid, incurred claims, operating expenses and losses on its net premium earned. It is calculated as:

       Losses + Expenses * 100
Earned Premiums

Lower combined ratio signifies that expenses and loses are lesser than it net premium revenue. If company’s combine ratio is more than 100%, it means that losses and expenses are more than the premium revenue. But higher combine ratio does not always signify that company is in losses, as ratio has not taken investment income into consideration.

4. Incurred Claims ratio: It indicates company’s ability to pay claims. It is calculated as:

       Total claims paid by company* 100
Total premium earned in a FY
         

If the ICR for the given year is 70%, which implies company has compensated Rs.70 on claims payout of every Rs.100 collected from premium revenue. Ideal range for the ICR should in between 75% to 90%, which indicates healthy settlement of claims by the insurer against the premium collection.

5. Claim Settlement Ratio: It indicates that how many claims the company has settled against the number of claims received in a particular year. Let us say, if the company has received 100 claim requests in a particular period and out of which it settles 95 claims, then the claim settlement ratio is said to be 95%.

All ratios discussed above are important and one should not consider any ratio in isolation. For insurance-cum-investment products factors like returns, cost, risk, tenure, guaranteed benefits, etc. should also be look. Apart from ratios, other parameters such as policy features, terms and conditions, insurer’s brand name, quality of service, etc. also matters before purchasing an insurance policy.

Insurance Statistics

Insurance is regulated and promoted by Insurance Regulatory and Development Authority of India (IRDAI) in accordance with the terms of IRDA Act, 1999. Insurance division deals with the policy and legislative matter as well as monitoring of the performance of both Life insurers and Non-Life insurers of the insurance industry.

Since opening of the insurance sector, the number of participants in the industry has gone up from six insurers in 2000 to 58 insurers as on 31st March 2019 which are operating in life and non-life insurance segments. Among Life Insurers, there are 24 participants from which LIC is the sole public sector company and rest 23 are private sector life insurers. Apart from that, among Non-Life Insurers, there are 34 participants out of which 25 are general insurers, 7 are Stand-Alone Private Health insurers and rest 2 are Specialized PSU insurers.

Globally, India’s share in insurance market has improved from 1.68% in 2017 to 2.0% in 2018. In world ranking, India is the 10th largest Life insurance market and 15th largest Non-Life insurance market.

To read the first Blog (Insurance - Introduction) in this Series. Click here 

For second Blog (Types of Insurance) in this Series. Click here 

For third Blog (Insurance Companies - How do they generate revenue?) in this Series. Click here 

For fourth Blog (Insurance premiums and its different types) in this Series. Click here 

 

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