Financial Ratios to Know While Buying an Insurance Policy

Buying an insurance policy is a fairly hassle-free process, only if one pays attention to the minute details as much as the sizable ones. With the need to buy a life insurance policy, arises the need to understand a few important elements surrounding the concept. One of those elements is the financial ratio which most people tend to ignore while buying an insurance policy.

Financial Ratio Should Ignore While Buying an Insurance Policy

Persistence Ratio

This ratio indicates the consistency that customers might or might not have maintained, with regard to policy renewal. Insurance companies measure this ratio at regular intervals to keep a track of people’s insurance policies and renewals.

The reason behind measuring this ratio is to understand whether or not customers have faith in the financial products that the insurance company has to offer. The formula to compute the persistence ratio is: number of consumers making premium payments divided by the total number of consumers/policyholders and multiplied by 100. Needless to say, higher the ratio, the better the scenario is for the insurance company.

Solvency Ratio

Solvency basically stands for a company’s ability to meet its financial obligations on a long-term basis. It defines how bad or good the financial situation of an insurance company is, which is further based on solvency norms. Every insurance company is obligated to maintain a 150% solvency ratio to prevent bankruptcy.

It basically gives the customer an idea whether or not the company will be able to settle claims in the future. The computation of solvency ratio is quite simple. It is calculated as the amount of Available Solvency Margin or ASM in correlation to the Required Solvency Margin or RSM.

Combined Ratio

This ratio demonstrates an insurance company’s outflow with respect to its operational costs, commissions, and claims that are incurred along with losses, if any. It is a general thumb rule to choose an insurance company with a comparatively lower combined ratio.

This, in turn, means that the company has reduced expenditure and losses as compared to the premiums that it is receiving. If the combined ratio of a company is 100% or more, then it is a definite red signal.

Claim Settlement Ratio or CSR

This ratio essentially provides data quantifying the claims that an insurance company has settled. The formula to compute CSR is the total number of claims settled divided by the number of claims that have been received.

While buying an insurance policy, keeping in mind the claim settlement ratio is important as it displays the total settlements made by the company and that in turn becomes an imperative parameter. It basically portrays the approach that a company is following and its standpoint towards reported claims.

Incurred Claim Ratio or ICR: This metric determines an insurer’s capacity to make payments for claims. The method of computing ICR is quite easy. The total number of incurred claims is divided by the total number of premiums earned so far. Ideally, an ICR should range between 75% and 90% which marks a healthy claim settlement from the insurer’s end.

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