Compare Term Insurance Policies

The first thing you do is try and see which insurance company has a better track record. For instance, buying a term insurance policy from a newly established company, say a year old, is a gamble you do not want to be taking with your life. You can’t meaningfully assess their performance since you never know how things might shape up in the future. Maybe their claim settlement ratios were very good last year but it could all go sour the very next year. In contrast, a company with a more extensive track record allows for a more robust evaluation of its consistency and performance over the years.

But what is a good track record?

The Indian insurance sector opened up to private entities in 2000, thus, most private insurance companies have a track record of less than 23 years. However, a company with a track record of 10 years or more is often considered reliable. A track record of 5 years and above is viewed as decent, while we generally advise steering clear of companies with a track record of less than 5 years.

Claim settlement ratio tells you about the percentage of claims settled by an insurer during a specified period. Put another way, a claim settlement ratio of 99 tells you that the insurance company settled 99 claims for every 100 claims they booked during the year.

This is perhaps the most important number you have to look at since with a term policy you want your claim paid out without any issue.

The figure is calculated using the formula: Claims settled / (Claims booked + Claims outstanding at the beginning - Claims outstanding at the end)

In our opinion, a claim settlement ratio of 99% and above is stellar. A claim settlement ratio of 98-99% is decent. And anything less than that is a no-go. Now you may think these numbers are relatively high. But that’s how it should be with a term policy. Death is final. There shouldn’t be a lot of debate on whether a company needs to settle a claim. In fact. IRDAI rules clearly state that no claim will be called to question if you’ve held the policy for 3 years or more. So a higher number is a requirement here.

You can find the claim settlement ratios in our comparison tables. Or you could go check out IRDAI’s annual report for the stated figures.

Claim settlement ratios do a very good job of representing the overall claim settlement process. But they still leave out some very important details. For instance, imagine a situation when a company pays out 99 claims after booking 100 claims in any given year. You would like to think that they settle almost every claim. But what if the 99 claims they settled were all worth 1 crore each whereas the one claim they rejected amounted to 10 crores? This is one way companies could manipulate their claim settlement numbers. Settle all the lower-value claims while denying the more expensive claims.

So to get rid of the bias, you can compare the amount settlement ratios for 2 companies. Simply look at the total amount settled as a percentage of the total value claimed by people. This should give you a good idea of who’s doing better.

It’s very easy to put up very good claim settlement numbers when you are settling a few hundred claims and dealing with a few thousand policyholders. But can you put up the same performance when you are selling tens of thousands of policies and dealing with similar volume of claims? Well, that’s what we want to try and answer when we look at the scale of business.

If a company has massive scale and they still put up impressive numbers, then that’s a massive positive. However, if a company is relatively smaller in scale, then maybe you should reconsider its figures. You can calculate the scale of business by looking at the new premiums they generated in the last few years.