When buying insurance policies, individuals often look at the coverage and the premiums of the plans and make their choice. They also consider your advice as you, as their insurance advisor, are better educated about insurance terms than they are. However, there are various ratios pertaining to the insurance company which are given a miss because of their technical nature. However, these ratios indicate the financial stability and trustworthiness of the insurance company and should not be missed. So, here are some of the most important insurance ratios which you should know so that you can educate your clients about them too –
- Claim settlement ratio
This is perhaps the most popular ratio which is considered by many individuals nowadays. The ratio measures the claims settled by the insurance company against the total claims made upon it. The ratio indicates how efficient the insurance company is in settling the claims made upon it. The higher the ratio the better it would be for the customer as it would depict that the company can be trusted in settling its claims.
- Persistency ratio
Persistency ratio is calculated by dividing the number of policies which are actively in force against the total policies issued by the insurance company. Persistency ratio is important in the sense that it denotes how satisfied the policyholders are with the policy that they have. If the policyholder is satisfied, he would continue with the policy thereby increasing the ratio. The ratio shows how many customers can the company retain year on year. Moreover, if the ratio is high it indicates that the customer has been sold the right policy, the customer trusts the insurance company and that you are effective in maintaining contact with the customer post selling the policy. High persistency also increases the revenue of the insurance company ensuring profitability.
- Solvency ratio
This ratio is a measure of the insurance company’s financial stability. The ratio is calculated as the amount of Available Solvency Margin (ASM) to Required Solvency Margin (RSM). The ASM represents the company’s assets over liabilities while RSM is calculated on the net premiums. The Insurance Development and Regulatory Authority (IRDA) mandates that insurance companies should have a solvency ratio of at least 150% to meet sudden claims which might arise in case of a calamity. The higher the solvency ratio, the better would be the financial position of the insurance company to pay off the claims.
- Incurred Claim Ratio
Incurred Claim Ratio measures the claims paid by the insurance company against the premiums collected in a financial year. The ratio indicates the profitability of the company and its claim incidence. A high ratio, i.e. a ratio which is more than 100%, is bad because it shows that the company is paying more in claims against the premiums received and is, therefore, making a loss. On the other hand, a low ratio is also bad as it shows that the company is make big profits and might be charging higher premiums. The ideal ratio is 70% to 90% which ensures neither too much profit nor loss.
- Commission expense ratio
This ratio measures the commission paid by the insurance company against the net premiums earned by it. The higher the ratio of the insurance company, the higher is the commission which the company is paying its middlemen. This is good for the company as it promotes its business in the long term. However, for customers, a high ratio would be bad because it would result in increase in the premiums payable. So, a company with a low commission expense ratio would be a better choice.
These are the five main ratios which customers should consider when choosing the insurer. The ratios would help individuals understand which insurance company would be better in terms of post-sales service offered, premiums charged and the probability of claim settlements. So, understand these ratios and make your customers understand them too so that they can choose the best insurance company for their insurance needs.