The vexed question of low claims ratios is once again front of mind in the inclusive insurance community. Our 2021 Landscape of Microinsurance Study showed a dip in global median claims ratios – or loss ratios as they are sometimes called – for microinsurance products. But low claims ratios are by no means a new phenomenon – as long ago as 2014, a Finmark Trust discussion paper by longstanding member of the MiN Nigel Bowman asked “How low can we go?” The answer, it seems, is lower than many may expect – but is that necessarily a bad thing?
The 2021 Landscape Study – launched in October at the International Conference on Inclusive Insurance (ICII) – shows that median claims ratios across all regions dropped from 23% in 2019 to 15% in 2020. Feedback from MiN members suggests this is well below expectations. Africa, at 17% , was slightly above average, followed by Asia (16%) and Latin America and the Caribbean (LAC) at just 12%. When adjusted to reflect ‘like-for-like’ data reporting*, the fall is three percentage points – not quite as dramatic but concerning enough in the year of the COVID-19 pandemic. In any case, the figure is significantly less than the 30%-40% certain experts suggested would be a “rough guide” for minimum claims ratios expectations earlier this year.
Why do claims ratios matter? Are we in danger of obsessing over the data, while missing the bigger picture? As we explained back in May, the received wisdom – especially among regulators and supervisors – has long been that low claims ratios are one aspect that may reflect poor customer awareness. Put simply, customers lack sufficient knowledge about the product they have purchased. They may even be unaware they have a policy – this is especially true of ‘bundled’ products. Other factors include high distribution costs, poorly trained intermediaries and salespeople, or failure to fully disclose all necessary information. Although not all causes or amplifiers of low claims ratios are negative, they can ultimately undermine trust and hinder uptake.
Against this declining trend, the MiN has published a briefing note, with inputs from Network members, on the topic, which asks three big questions: are claims ratios important? What could lead to a low claims ratio? And how can we set the ‘right’ claims ratios and use them responsibly? As well as insights from key players in the inclusive insurance sector, the paper takes a lead from discussions at the last June Member Meeting (JMM) which devoted a session to the issue.
“We asked participants what claims ratios tell us about a product’s performance,” says the MiN’s Knowledge Manager Mark Robertson. “Most people acknowledged that claims ratios are helpful when trying to understand customer value and experience for a given product, the viability and sustainability of the product, and whether there are potential problems with a product such as mis-selling or poorly-designed claims processes. However, many people also pointed out that while the claims ratio is a useful guide, it doesn’t tell the whole story and is not the only measure of viability or value.”
Low claims ratios matter because they are a strong indicator – although not the only one – of customer value. “All else being equal, higher claims, a lower profit margin, or lower expenses can increase customer value as a share of total premium,” says Robertson. “High acquisition costs and commissions can, for example, leave less room for claims. However, it’s important to note that this is a generalisation: claims paid is not the sole mechanism to deliver customer value.”
The briefing paper emphasises there are multiple factors at play which can influence product value. For example, you could argue that increasing expenses could actually boost customer value because it could potentially result in better delivery of value-added services or better customer interaction. Overall, though, it concludes that “paying claims is one of the most visible ways that insurance products typically show their value, and low claims ratios can thus impact on insurers’ credibility if mismanaged.” As FSD Africa and Cenfri point out in a 2019 report, “High costs inhibit insurers’ ability to pay claims and innovate, which reduces client value and can, ultimately, undermine trust in the insurance sector.” On the other hand, if claims go too high, they can also have a detrimental impact by reducing profits to the point where an insurance product is no longer viable – and that goes against the interests of both the insurer and its customers.
As if this balancing act wasn’t tricky enough, products can expect to experience different claims ratios at different stages of their life cycle. A simple snapshot may reveal a very different ratio to one averaged out over a number of years. For example, a newly launched product – especially one with waiting periods – will often show a low claims ratio, sometimes as low as 0%. Products take time to ‘settle in’ and the age of the product needs to be considered along with the claims ratio. For example, Geric Laude, Head of Non-Life Retail at Pioneer in the Philippines – a company which built its reputation on paying claims – says that in his experience a new product can take up to three years before the claims ratio settles and can serve as a reliable indicator of that product’s performance. Even then, a major natural disaster or similar low-probability, high-impact event can significantly alter an otherwise ‘normal’ claims ratio.
How, then, can insurers, actuaries, regulators, and supervisors gauge what constitutes ‘too low’ for any given product or market? The MiN paper offers three pieces of advice, based on insights from those who contributed. Firstly, and most significantly, it’s important to look at claims ratios in context, not in isolation. Other ratios and metrics should be considered and factored in. Secondly, insurers should see claims ratios as part of understanding customer experience, product knowledge and product viability. Claims ratios can help build trust and brand in the market and should be used to influence product design, distribution, and servicing models. Thirdly, it is extremely difficult to define what counts as too low for a claims ratio, and low claims ratios are not necessarily bad in themselves.
Armed with these insights, the paper makes a number of recommendations for insurers and regulators to re-evaluate how they use claims ratios. These include examining products from a customer-centric viewpoint and deliberately building the best customer experience possible; increasing operational efficiency; creating a regulatory environment that encourages responsible innovation; and sharing best practice and data.
“The quality of the inputs from our members and the subtlety of the discussion made it clear that we should share the details more broadly with our Network, which is why we produced this briefing paper,” says Robertson. “This is an important discussion for the inclusive insurance community globally, and we need to approach it with thoroughness and a desire to understand the complexity so that we can best address the risk needs of low-income customers.”
Download the claims ratios briefing note (members only)
*accounting only for those insurers that responded in both the 2020 and 2021 Landscape Studies (2019 and 2020 data)