By Rakesh Goyal
When it comes to buying an insurance policy, there are six specific ratios which identify the insurer’s strengths and weaknesses as well as its financial performance. So, the next time you go to get an insurance policy, consider these six ratios to gain a better understanding of the product.
Persistency ratio
The persistency ratio is calculated by dividing the number of policyholders paying premiums by the net active policyholders, multiplied by 100. If the persistency of the insurer is very good for the 25th or 61st month, that would mean individuals have continued to invest in the policies of that company.
Solvency ratio
The solvency ratio suggests insurance companies’ ability to service claims. Rules require insurers to have a solvency ratio of 150%. So the higher the solvency ratio, the better the prospectus of insurers to pay the claims. The solvency ratio is the actual solvency margin (ASM) divided by the required solvency margin (RSM).
Incurred claim ratio
Another important ratio from the policyholder’s perspective is the incurred claim ratio (ICR). It is the value of all the claims paid by the insurer divided by the premiums received in a particular year. If the ICR is more than 100%, it means the insurer is paying more claims compared to the premium it receives. ICR lower than 100%, or between 50 and 75%, indicates it is making good profits.
Combined ratio
This ratio indicates the underwriting process of the insurance companies. The underwriting process is where the insurer determines whether or not and on what basis it will accept an application for insurance. A combined ratio of more than 100% shows that it is paying more in claims compared to the premiums received while a combined ratio of less than 100% shows that insurers are generating underwriting profits.
Claim settlement ratio
This ratio indicates the number of claims settled by the insurance companies during a particular year or quarter. When you see an advertisement stating that an insurer has a claim settlement ratio of 95% it means that it has honoured 95 out of 100 claims filed. The greater the claim settlement ratio, the better for the policyholder.
Value of new business
It is the present value of expected future earnings from new policies written during any given period and it reflects the additional value to shareholders expected to be generated through the activity of writing new policies during any given period. In fact, the value of new business (VNB) for any period reflects actual acquisition costs incurred during that period. The VNB margin is the ratio of VNB to Annualised Premium Equivalent (APE) for any given period and is a measure of the expected profitability of new business. This ratio refers to the life insurers, and the higher the VNB and VNB margin, the better for the company.
The writer is director, Probus Insurance Broker