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Important Insurance Ratios to Know About

Published On Mar 28, 2023 10:45 AM By InsuranceDekho

When purchasing an insurance policy, it is vital to comprehend all the jargon and other important details regarding it. Mostly, it is asked the policyholders to check the sum assured, add-ons, inclusions, and exclusions while purchasing insurance products. However, one thing we frequently overlook is insurance ratios. In total, there are six key financial ratios for insurance companies. Each ratio serves a distinct purpose for the customers. Read on to learn about each insurance ratio in detail! 

Important Insurance Ratios to Know about

Key Financial Ratios for Insurance Companies

Listed below are some of the ratios that are important to an insurance company. 

  • Persistency Ratio: 

The persistence ratio is an indicator of customer satisfaction. In simple terms, this ratio helps you know about the renewal rate of insurance plans bought by customers. This ratio is determined by how satisfied policyholders are with an insurance company's product line, which includes customer service, after-sales service, and more. The higher the persistent ratio, the higher the level of customer satisfaction. It is measured at various intervals to assess the level of customer trust in an insurance company's long-term products and services. Below is a persistency ratio formula. 

Persistency ratio = No. of policyholders paying premium / Net active policyholders * 100

  • Solvency Ratio: 

The solvency ratio defines the financial situation of the company. According to the guidelines issued by the Insurance Regulatory and Development Authority of India (IRDAI), it is mandatory for all insurance companies to maintain a solvency ratio of 150% to eliminate the risk of bankruptcy. In simple terms, a solvency ratio helps in determining if the company has sufficient funds for claim settlement in extreme situations. The higher the solvency ratio, the higher the chances for a high claim settlement ratio. Therefore, it is suggested that you check the solvency ratio of the company before purchasing an insurance policy. The solvency ratio is calculated using the following formula: 

Solvency ratio = (Net income + Depreciation) / Liabilities

  • Combined Ratio: 

The combined ratio in the insurance sector is used to describe how profitable an insurance company is in terms of its ongoing business operations. The primary objective of calculating the combined ratio is to determine the growth on the basis of the profitability of the insurance company. Furthermore, it is also calculated to determine how well the insurance company manages its operations and how effectively it makes use of its resources. You need a list of underwriting expenses, such as the agent’s commission, staff salaries, and various other overhead expenses, to calculate the combined ratio. Here’s a combined ratio formula that you can use to determine a combined ratio: 

Combined ratio = Expense ratio + Underwriting loss ratio 

Where expense ratio = underwriting expenses / net premiums earned

  • Incurred Claims Ratio: 

The Incurred Claim Ratio (ICR) provides a broad overview of the financial situation of the company. It measures the proportion of net premiums collected over the course of a financial year to net claims paid by an insurance provider. According to IRDAI guidelines, it is mandatory for all general and health insurance companies to publish ICR in their annual reports. It is suggested to purchase an insurance policy with a moderate incurred claim ratio that is between 50% to 100%. In this situation, the insurance company is financially healthy and creating wealth. 

Incurred claim ratio = Net claims settled / Net premium collected 

  • Commission Expense Ratio: 

The commission expense ratio determines the amount paid for commissions from the written premium during a particular period. It is advisable to check the expense ratio of the company, as it directly impacts the premium paid by the policyholder. The higher the commission expense ratio, the lower the discount offered, leading to a higher premium. Therefore, the lower the commission expense ratio, the better it is. 

Commission Expense Ratio = Total expenses / Average value of the portfolio 

  • Claim Settlement Ratio: 

It is one of the most important factors that policyholders should take into account. It indicates the number of claims settled by an insurance company during a particular year. Furthermore, it also builds the credibility of an insurance company. The higher the claim settlement ratio of the company, the greater the chances of a smooth and seamless claim settlement process. 

Claim Settlement Ratio = Total no. of claims settled in a year/ total no. of claims received in a year * 100 


To sum up, there are numerous factors such as sum assured, policy tenure, claim process, benefits, and much more that must be taken into consideration by the policyholder. However, in addition to these parameters, you must also consider the above-mentioned insurance ratios at the time of purchasing an insurance policy.

Also Read: 

Detailed Guide on Pension Payment Order in EPF


This article is issued in the general public interest and meant for general information purposes only. Readers are advised not to rely on the contents of the article as conclusive in nature and should research further or consult an expert in this regard.

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