What is settlement of insurance claims?

Industry insiders often refer to claim settlement as a life insurance company’s moment of truth. It is one of the most critical services an insurance provider is obligated to fulfill for its customer. Simply explained, claim settlement refers to the process whereby a life insurance company pays out the sum assured and other benefits as laid out in the policy document. 

Every company uses a metric called claim settlement ratio to record the percentage of these claims it has settled or paid during a financial year from the total claims received. For instance, if a company has a claim settlement ratio of 97%, it means that it settled 97 of 100 claims received during the year. The remaining three were repudiated after the company conducted due diligence. 

All insurance companies are required to measure and report their claim settlement ratio to the regulator. In turn, the insurance regulatory body, IRDAI, publishes this data in its annual report on its website.  

What Claim Settlement Ratio Tells About the Company

Customers often consider claim settlement ratio as an indicator of an insurer’s reliability to pay out their claim. Apart from a company’s reliability, this ratio also underlines the quality of a life insurer’s business along with certain other data points like persistency ratio, net promoter score, etc. However, a single number doesn’t tell the whole story. 

It is important to look at every company’s claims track record – a consistency is as critical as a higher claim settlement ratio. It reflects a pattern of resolution of robust claims and underwriting practices at the company.  

Why Life Insurers Reject Claims

Claim settlement has been a fairly misunderstood subject. With the industry’s mistrust issues in the past, a significant number of customers have been disillusioned with insurance companies’ customer service practices. People believe a company to be fraudulent and ill-intentioned if a claim is rejected. However, life insurance companies seek to settle every genuine claim. 

Certain business nuances like fraudulent claims require companies to follow stringent processes. In fact, new technologies like Data Analytics and Machine learning are allowing life insurers to tighten their underwriting and risk management practices including fraud detection and mitigation at early stages. 

As a customer, you also can help your life insurer in ensuring a seamless claims process. With this context, I think it is important to be aware of why certain claims are rejected.  

1. Incomplete customer disclosures 

The main purpose of a life insurance policy is to get the eventual benefit. So, it is important to provide honest and complete information to your life insurer. The information you provide at the underwriting stage helps your company correctly estimate your risk profile and therefore determine the premium you are required to pay for the desired life cover. 

In a bid to avoid an increase in premium payable, customers often hold back certain pertinent information (financial and medical), which may lead to claim rejection in the future.  

Your medical records and habits offer useful information to a life insurer. Your medical status can often lead to reinvestigation of your claim and eventually a rejection if there is any significant divergence. So, it is absolutely critical to be truthful and honest when disclosing medical information to your insurer. 

Consumers, at large, see medical tests as a tedious task necessary to buy life insurance. Policies that don’t need medical testing are viewed in a good light. However, medical tests are objective way of establishing your health status when buying a policy. This information cannot be overlooked or disputed by your life insurer in the future. 

Life insurance considers a concept called Human Life Value (HLV). HLV estimates the financial dent caused by loss of an individual’s life on their dependents. Quite naturally, HLV differs from person to person. When you apply for a new policy, your existing life cover tells your life insurer whether you are adequately covered and need this new insurance policy that you have applied for. 

However, with the interest to protect the customer, the regulation now states that a life insurer cannot reject a claim on any grounds whatsoever, after 3 years of policy commencement date. In case of revival of policy, this rule is effective from the date of revival. 

How to Raise a Claim 

Here’s the different types of claims and how each are processed:

In case of a death claim, the nominee must follow this process – 

• Intimating your insurer: The first, most important step is intimating your claim to the life insurer. The claimant needs to fill a detailed intimation form which includes disclosure of information like name of the insured, policy number, cause of death, date of death, place of death, name of the claimant (you) etc. You can procure this form by reaching out to your insurance advisor, the insurer’s contact center or the website of the company. Some insurers also offer these forms in various languages to make the process easily understandable and simpler for the claimant. 

• Submit required documents: As a claimant, you will need to provide a written statement, called claimant’s statement, death certificate of the insured, original policy document, and any other document needed by the insurer. 

In case of early death claims, i.e., for claims that arise in less than three years of issuing the policy, the insurance provider may conduct an additional investigation to ensure its integrity. As a part of the procedure, the company may undertake the following actions:

• Verify with the hospital where the insured was admitted for treatment
• In case of accidental death, check with relevant authorities to confirm the veracity of the circumstances
• If the insured dies of medical causes, the insurer may ask for treatment records, doctor’s certificate, post-mortem report, police FIR etc.

It is crucial to submit all the requisite documents as early as possible for a quick settlement. Unless your insurer receives all these documents and conducts due diligence, the claim will not be settled. 

There are additional riders such as critical illness rider, accidental rider, waiver of premium rider, etc that can be bought with a life insurance product to secure your dependents from certain events. The claim process typically differs in such cases. For instance, waiver of premium rider or accidental disability must be filed as a standalone claim. In such claims, the insurance company asks for documents such as FIR copy, disability certificate from the treating doctor, hospital report, etc.  

1. Maturity and Survival Claims

The payment released by an insurance provider on completion of the policy term or the maturity date is known as maturity payment. The payable amount includes the sum assured and any incentives or bonuses. In such cases, the insurance company needs to inform the policyholder in advance. The company sends a policy discharge form to the policyholder, which needs to be filled and returned to the company along with the original policy document, valid identification proof, copy of the policyholder’s bank passbook copy or a canceled cheque. 

What Happens After you File a Claim?

Once you have filed your claim with required documentation, your life insurer ensures the policy is active and verifies the beneficiary’s identity. As per regulation, a claim has to be settled within 30 days of receiving all the necessary documents. In case a claim demands further investigation, the insurer must take 90 days for adjudication and another 30 days for payment from the claim initiation date. 

Things to Remember to Ensure your Intended Beneficiaries Can Get the Claim Hassle-free 

• Thoroughly read the policy’s terms and conditions when you receive the policy document – quite cliché, but knowledge is power. It is absolutely vital to be aware of the benefits, inclusions and exclusions of your life insurance policy
• Understand the claim settlement process beforehand and discuss it with your loved ones
• Give accurate details to your life insurance company when buying the policy
• Update your policy or add life cover with every critical life stage or event 
• Inform your nominee about the policy and educate them about the process

In most instances, an adjuster will inspect the damage to your home and offer you a certain sum of money for repairs, based on the terms and limits of your homeowners policy. The first check you get from your insurance company is often an advance against the total settlement amount, not the final payment.

If you're offered an on-the-spot settlement, you can accept the check right away. Later, if you find other damage, you can reopen the claim and file for an additional amount. Most policies require claims to be filed within one year from the date of disaster; check with your state insurance department for the laws that apply to your area.

You may receive multiple checks

When both the structure of your home and your personal belongings are damaged, you generally receive two separate checks from your insurance company, one for each category of damage. If your home is uninhabitable, you'll also receive a check for the additional living expenses (ALE) you incur if you can’t live in your home while it is being repaired. If you have flood insurance and experienced flood damage, that means a separate check as well.

Your lender or management company might have control over your payment

If you have a mortgage on your house, the check for repairs will generally be made out to both you and the mortgage lender. As a condition of granting a mortgage, lenders usually require that they are named in the homeowners policy and that they are a party to any insurance payments related to the structure. Similarly, if you live in a coop or condominium, your management company may have required that the building's financial entity be named as a co-insured.

This is so the lender (and/or, in the case of a coop or condo, the overall building), who has a financial interest in your property, can ensure that the necessary repairs are made.

When a financial backer is a co-insured, they will have to endorse the claims payment check before you can cash it.

Depending on the circumstances, lenders may also put the money in an escrow account and pay for the repairs as the work is completed. Show the mortgage lender your contractor's bid and let the lender know how much the contractor wants upfront to start the job. Your mortgage company may want to inspect the finished job before releasing the funds for payment to the contractor.

If your home has been destroyed, the amount of the settlement and who gets it is driven by your policy type, its specific limits and the terms of your mortgage. For example, part of the insurance proceeds may be used to pay off the balance due on the mortgage. And, how the remaining proceeds are spent depend on your own decisions, such as if you want to rebuild on the same lot, in a different location or not rebuild at all. These decisions are also driven by state law.

Your insurance company may pay your contractor directly

Some contractors may ask you to sign a "direction to pay" form that allows your insurance company to pay the firm directly. This form is a legal document, so you should read it carefully to be sure you are not also assigning your entire claim over to the contractor. When in doubt, call your insurance professional before you sign. Assigning your entire insurance claim to a third party takes you out of the process and gives control of your claim to the contractor.

When work is completed to restore your property, make certain the job has been completed to your satisfaction before you let your insurer make the final payment to the contractor.

Your ALE check should be made out to you

Your check for additional living expenses (ALE) has nothing to do with repairs to your home. So, ensure that this check is made out to you alone and not your lender. The ALE check covers your expenses for hotels, car rental, meals out and other expenses you may incur while your home is being fixed.

Your personal belongings will be calculated on cash value, first

You'll have to submit a list of your damaged belongings to your insurance company (having a home inventory will make this a lot easier). Even if you have a replacement value policy, the first check you receive from your insurer will be based on the cash value of the items, which is the depreciated amount based on the age of the item. Why do insurance companies do this? It is to match the remaining claim payment to the exact replacement cost. If you decide not to replace an item, you’ll be paid the actual cash value (depreciated) amount for it.

To get replacement value for your items, you must actually replace them

To get fully reimbursed for damaged items, most insurance companies will require you to purchase replacements. Your company will ask for copies of receipts as proof of purchase, then pay the difference between the cash value you initially received and the full cost of the replacement with an item of similar size and quality. You'll generally have several months from the date of the cash value payment to purchase replacements; consult with your agent regarding the timeframe.

In the case of a total loss, where the entire house and its contents are damaged beyond repair, insurers generally pay the policy limits, according to the laws in your state. That means you can receive a check for what the home and contents were insured for at the time of the disaster.

Next steps: We can't reinforce it enough - claims are easier to make when you have a home inventory ready!