Here are a few key ratios to consider before buying insurance 8th February 2023
It is difficult for us to pick out the best insurance providers in the market without having in-depth knowledge about the company. You should not choose your insurance company by merely watching their advertisements in the media or by what your agent suggests. Always get in-depth knowledge about the credibility of the insurance company, its financial strength and stability, and the capability to support you financially in times of need.
Here are a few key ratios that will help you better understand an insurance company and which you should consider before buying insurance.
1. Claim Settlement Ratio:
This is the first and foremost ratio you should consider when choosing your insurance company. It denotes the number of claims settled by the insurance company per 100 claims it receives.
Even if an insurance company with a low CSR offers you a policy at a lower premium than others, you should avoid buying it. After all, such savings can be futile if your company rejects your claim during a medical emergency. The whole purpose of buying an insurance policy is forfeited in such a case. Hence, the company with the highest CSR should be given preference.
2. Liquidity ratios: Liquidity ratios tell you how capable the company is of meeting its financial obligations and claims raised by the policyholders. An insurance company should have good liquidity and be able to fulfill its payment obligations in case a huge number of unexpected claims come up suddenly at any point in time. This can happen in catastrophes such as floods and earthquakes when many people may raise insurance claims in a short period.
It also provides information on an insurance company's capability to meet its current liabilities from its liquid assets. A ratio of less than one will mean that the company may have to sell its long-term investments or borrow money to meet its current liabilities. This can be a worrying situation for the company and the people buying its insurance policies.
3. Solvency ratios:
Put theoretically, a company's solvency ratio measures its capacity to meet its debt obligations and other financial commitments. The current solvency ratio prescribed by the IRDAI for insurance companies is 1.5 in India. A ratio lower than 1.5 is a cause for concern for insurance buyers. It may result in bankruptcy risk if the company faces many sudden claims.
4. Earnings ratios:
The following two important earnings ratios ascertain the profitability of the insurance company and its competitive strengths.
Combined ratio:
There are several operating expenditures, commissions, and claims that an insurance company has to meet. Their cumulative total should be less than the total premium earnings for that period. A lower value of the combined ratio is advisable.
Return on net worth:
This ratio tells us the profit-earning capacity of an insurance company concerning its net worth. It considers the profit earned by the company after tax and indicates the overall return on equity of the insurance company. A higher ratio is better and preferable.
It is an arduous task to choose the best insurance company in the market, especially when so many big companies operate in the field of general insurance. A buyer should carefully review the above ratios and rate the available options accordingly. Before buying its policy, a good understanding of the insurance company is of utmost importance.
A policy buyer should be confident that his decision to choose one insurance company over another is sound and backed by statistics and numbers. After all, the insurance company should stand by his side and provide him hassle-free financial assistance in times of real need and emergency.
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Disclaimer: The information provided above is for illustrative purposes only. To get more details, please refer to policy wordings and prospectus before purchasing a policy.