Important Insurance Ratios for Insurance Companies in 2024

As the awareness of the importance of insurance is growing rapidly and insurance companies are introducing new plans to the market meeting the requirements of people of all ages and professions, it is important to identify the important factors which influence your decision-making. It may seem that all insurance companies offer similar policies with little to no difference in premium and coverage, and it conflicts with the customer regarding which insurer to pick. 

This article discusses the various ratios on which insurance companies can be compared and can help the customers to make an informed decision. These parameters can help to assess an insurer's profitability, efficiency, and overall financial stability. In this article, we will discuss the six key ratios which can be used by customers to form an impression of any insurance company. 

Key Financial Ratios for Insurance Companies

Listed below are some of the ratios that are important to an insurance company.

1. Persistency Ratio

As the name suggests, the persistency ratio indicates how many policyholders ‘persist’ in a given period, usually one year. It is the ratio of active policies (policyholders paying premiums) and the total number of policyholders. If an insurer does not meet customers' expectations regarding claim settlement, customer support, post-sales services, etc., policyholders will eventually stop paying premiums. Hence this ratio determines the customer satisfaction from an insurance company. The higher the persistence ratio, the higher the customer satisfaction. 

Formula: Persistency ratio = No. of policyholders paying premium / Net active policyholders * 100

Favourable Range: 85% - 100%

Unfavourable Range: Less than 85%

2. Solvency Ratio

The solvency ratio determines the financial stability of an insurance company. The Insurance Regulatory and Development Authority of India (IRDAI) has made it mandatory for all insurance companies to maintain a 150% solvency ratio to ensure that an insurer fulfills its obligations to provide claims to policyholders in case the company goes bankrupt. So in simple terms, it is fair to say that the solvency ratio determines if the company has enough funds to settle claims in the most extreme cases as well. The higher the solvency ratio, the lower the risk of the company not being able to provide a claim.

Formula: Solvency ratio = (Net income + Depreciation) / Liabilities

Favourable Range: Above 1

Unfavourable Range: Below 1

3. Combined Ratio

Combined ratio is used to define the profitability of an insurance company in terms of its operations and business. The combined ratio also indicates how effectively a business makes use of its resources. If the combined ratio is less than 100%, it implies that the company is making profit by getting more premiums than paying claims and other expenses. And if the combined ratio is more than 100%, it means that the company is in loss by paying more claims and expense than collecting premiums. 

Combined ratio depend on various factors like agents commission, staff salaries, and various other operational expenses.

Formula: Combined ratio = Expense ratio + Underwriting loss ratio 

Where expense ratio = underwriting expenses / net premiums earned

Favourable Range: Below 100%

Unfavourable Range: Above 100%

4. Incurred Claims Ratio

The Incurred Claim Ratio (ICR) is the ratio of net claims settled and net premium collected. It reflects the financial situation of an insurer. The IRDAI has made it mandatory for general and health insurers to publish their ICR in the annual report. A low ICR means the insurer is in a strong position as it is collecting more premiums than paying claims whereas an ICR of 100% means the company is at risk as the premiums getting collected are exactly the same as claims being played. 

Formula: Incurred claim ratio = Net claims settled / Net premium collected 

Favourable Range: 50% - 100%

Unfavourable Range(s): (i)Below 50%, (ii) Above 100%

5. Claim Settlement Ratio

Claim settlement ratio determines the relationship between claims filed and claims approved in a given time period, usually a year. It indicates the claim settlement efficiency of an insurance company. Higher claim settlment ratio ensures a policyholders trust in the company. The higher the claim settlement ratio, higher the chances of getting a smooth hassle free settlement.

Formula: Claim Settlement Ratio = Total no. of claims settled in a year/ total no. of claims received in a year * 100 

Favourable Range: 85% - 100% 

Unfavourable Range: Less than 85%

6. Commission Expense Ratio

The commission expense ratio defines the commission paid from the written premium during a particular period. You must check the commission expense ratio as it influences the premium paid by the policyholder.  A low commission ratio is in favour of policyholder as the lower the commission ratio, the higher is the discount offered which leads to a lower premium.

Formula: Commission Expense Ratio = Total expenses / Average value of the portfolio

Favourable Range: Below 20%

Unfavourable Range: Above 20%

Conclusion

In conclusion, apart from basic parameters like premium and coverage, there are various other factors that should be considered before purchasing a policy. We discussed six key ratios in this article which determine the financial stability, customer satisfaction, and profitability. Insurance companies can be compared to each other on the basis of these ratios which enables customers to make a much more informed decision. 

To compare quotes from different insurers for free, visit www.insurancedekho.com.

FAQs 

Ques 1. Why are these ratios important?

Ans. These ratios are used to evaluate an insurance companys performance, business, and finances. You can determine a companys customer satisfaction, claim settlement, and financial stability by analysing these ratios. It enables customers to make a well informed decision.

Ques 2. How does these insurance ratios benefit customers?

Ans. Customers can use these ratios while they are confused on which insurer to pick. One might be getting a very similar policy from different insurers, these ratios will help in clearing the dilemma.

Ques 3. When do these ratios get updated?

Ans. These ratios are generally calculated annually, but some of them are also calculated quarterly. Some of these ratios are published in annual reports as well.

Ques 4. How to analyse an insurer based on these ratios?

Ans. Customers should prioritize claim settlement and customer satisfaction while looking at these ratios.