The Insurance Regulatory and Development Authority of India (IRDAI) has directed the non-life insurance industry to establish a standard definition of a claim and a uniform definition of the claim settlement ratio across various lines of business. This directive comes in response to inconsistencies among companies in how they define and report claim settlement ratios, a critical metric that reflects both financial health and customer satisfaction.
Current Disparities in Claim Definitions
Currently, different insurers use varied approaches when registering and settling claims. Some companies register a claim at the first instance of intimation, while others only do so after establishing liability under the policy. For policyholders, a 'settled claim' typically means the insurer has paid the amount to their satisfaction. However, some insurers classify claims closed due to non-availability of documents or those rejected for falling outside policy scope as 'settled'. This practice inflates settlement numbers but provides a distorted picture of actual customer payouts.
Industry Efforts to Standardize
An industry source revealed that the General Insurance Council has submitted its views to IRDAI on a standard definition of a claim and a uniform approach to define the claim settlement ratio for various lines of business. The goal is to present a clear and consistent picture of a company's claim settlement standards, eliminating variations caused by different practices at each stage of the process.
KK Srinivasan, former member (non-life) at IRDAI, emphasized that a claim should only be considered settled when the client confirms satisfaction. Until then, the claim remains pending or disputed. He further noted that if a claim is repudiated by an insurer, the policyholder can legally dispute it within three years of repudiation. Such claims remain disputed until the court disposes of the matter. Once a court admits the repudiation or dispute for hearing, it must be treated as unsettled until the court or forum delivers its order and the insurer complies.
Impact on Claim Settlement Ratio and Underwriting
Insurers often require claimants to sign a discharge voucher accepting full and final settlement. However, many claims involve dissatisfied customers. The definition of a claim is crucial for calculating the incurred claims ratio, which determines underwriting profits. A broad definition would force insurers to set aside funds for every demand, even when coverage is not active.
A former CEO of a non-life company explained that the claim settlement ratio should be evaluated over a period. It is possible for a company to achieve a ratio exceeding 100% if it settles all claims, including those pending from the previous year.
