Friday, 19 August 2016

What if my insurance company goes bankrupt in India?

Every one of us might have bought the insurance from private companies. However, somewhere in our subconscious mind there remains number of questions like “What if the private insurance company goes bankrupt? What if the private insurance company does not entertain our claim on the unfortunate event of death of our loved ones? Or else we do not have a heart to accept the fact that the private companies are equally good as those of public insurance companies. 

If you are the one who have above questions running in your mind about selecting insurance from private companies then you have landed on the right page on internet.

Such questions create uncertainty in the attitude of investors.
Insurance in India is regulated by IRDA which has complete control over the insurance companies whether government owned or private. As per the guidelines of IRDA, in order to register the insurance company in India, Company has to be registered with IRDA with minimum investment of Rs 100 Crore for life Insurance. Apart from this, the company has to invest Rs 200 crore for reinsurance business.

Not only the capital requirement is considered by IRDA, but there is also a long procedure to get the license in order to start the insurance company. IRDA also keeps a close watch at the solvency ratio and the claim settlement ratio of the companies that is discussed in the next section of the article. 

Must Read : What, Why and Different Types of Term Insurance and different types of riders available in Insurance

All the products of insurance companies are also approved by IRDA. IRDA strictly follow these norms in order to build faith among the investors.The product can be brought into the market after the approval from IRDA. This stringent guidelines of IRDA helps you, as the company and the products of the private insurance company are launched properly.Also the agents also undergo the training of 100 hours from IRDA and thus are qualified and well trained.

Two most important factor while selecting an Insurance Company is keeping in mind the risk, the solvency ratio and claim settlement ratio(CSR) which are also available in the IRDA website. 

Let us first understand what is solvency ratio?

Solvency is defined as "The possession of assets in excess of liabilities; ability to pay one’s debts" 

Solvency Ratio” means the ratio of the amount of Available Solvency Margin to the amount of Required Solvency Margin.

Available Solvency Margin” means the excess of value of assets over the value of liabilities i.e premium written  

The solvency ratio is the only one measure, which informs us whether the company will stay solvent or not.
With the help of solvency ratio one can make sure that whether the company’s cash flow is sufficient to meet its short term as well as long-term liabilities. Hence, solvency ratio is the crucial component, which must be considered before the selection of the insurance company.Based on the solvency ratio the you can select the best insurance company. 

IRDA has prescribed solvency ratio of 1.5 for Insurance companies in India.

Must Read : Why Not To Purchase Term Insurance With A Return Of Premium Option? 

Let us simplify solvency ratio with an example 

Insurer A has a liability of Rs.1000 and arrives at a solvency margin of say Rs.1100. This means the required assets should be worth Rs.1100. But in order to provide a further cushion to this number, IRDA has prescribed a solvency ratio of 150% i.e 1.5, which means the insurer will need to maintain Rs.1500 instead of just Rs.1100.

Solvency Ratio is available in the annual report published on the IRDA website, click here 
Following table shows the quarterly solvency ratios of Insurance companies for every quarter for 2014-2015.
Source IRDA 2014-2015 Annual Report
As per the above report DHFL Pramerica has the highest solvency ratio of 12.69, next is Bajaj Allianz and LIC has the lowest solvency ratio of 1.55.
LIC is government owned and in case of any downward movement in solvency ratio, Government of India (GOI) can infuse capital. The only worst scenario would be GOI going bankrupt like Greece for which chances are very very slim as Indian economic situation had been good even through the tough times of 2008-2009 recession.
In a Nutshell "Higher the solvency ratio indicates better company profile"

Must Read : Why Term Insurance is required till 60 years

Next is Claim Settlement Ratio 
The main purpose of the insurance will be beaten if the policyholder does not get the claim when required.
In that case, the claim settlement ratio is required and it can be explained as the total number of death claims settled by an insurance company.It is calculated by dividing the total number of death claims received by the total number of settled cases by the insurer.
Claim Settlement Ratio=Total Number of Death Claims /                                              Total number of cases settled

Say for example, the Reliance insurance gets the death claims around 1000 and it is capable of settling only 960 claims, then the claim settlement ratio of Reliance will be 96 percent. As the claim settlement ratio gets higher, the company becomes more favorable for the investors.

Source :
LIC of India has the best Claim Settlement Ratio (CSR) where as the next 6 are very close in terms of % and with better CSR
Combination of  Solvency Ratio + Claim Settlement Ratio is a must because if you look at solvency ratio of DHFL Pramerica is 12.69 where as CSR is only 57.19% which dissolves the whole purpose of buying an Insurance 

Must Read : How Much Insurance Do you Need


Yes it is safe to buy from a private insurance companies provided the policy which you are buying is cost effective.

I personally have bought 2 Term Insurance policy of 75 Lakhs each after comparing their quotation, selecting the cheapest one and after checking their Solvency Ratio and Claim Settlement Ratio 

This way i have mitigated the risk of Insurance company going bankrupt (chances are very very less due to stringent guidelines by IRDA) ,if this risk occurs , there would be other company around to settle me. The chances of both of them going bankrupt are almost negligible, what do you say ?

Do let me know your thoughts in comment section....

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