Insurance companies use various metrics to measure their performance and health. Think of these metrics as vital signs for a business, to be measured to keep a check on the Insurers’ health. Let’s break down some of the most important Key Performance Indicators (KPIs) for Insurance companies in simple terms for investors, VCs and startups interested in the sector:
1. Gross Written Premium (GWP)
GWP is the total premium collected by an insurer before deductions, including reinsurance premiums. GWP includes reinsurance premiums, while Gross Direct Premium (GDP) excludes them, focusing on direct premiums collected.
The IRDAI releases periodic reports with data of GDP of each Insurer.
2. Net Earned Premium (NEP)
This is the money the insurance company actually gets to keep after accounting for various factors. Think of it as the company’s “take-home pay.”
3. Loss Ratio
This shows how much the insurance company is paying out in claims compared to the premiums they’re collecting. A lower loss ratio generally indicates better financial health, as it means the company is earning more from premiums than it is paying out in claims. However, a loss ratio that is too low might suggest that the company is undercharging for its policies, which could lead to financial problems in the future if claims are higher than expected.
Example: If Bajaj Allianz reports a loss ratio of 70.3%, it means for every ₹100 they collect in premiums, they’re paying out about ₹70 in claims. The remaining ₹30 helps cover other expenses and hopefully leaves some profit.
4. Combined Ratio
This ratio adds up all the money going out (claims paid and operating expenses) and compares it to the money coming in. If it’s over 100%, the company is spending more than it’s earning from premiums alone. It’s an important KPI for the insurance companies.
Example: New India Assurance reported a combined ratio of 112.64%. This means they’re spending about ₹113 for every ₹100 they earn in premiums. They’ll need to make up this difference through investment income or other sources to stay profitable.
5. Solvency Ratio
This is a safety check to make sure the insurance company has enough money to pay all potential claims, even in unexpected situations. The government requires a minimum level to protect policyholders.
Example: LIC’s solvency ratio of 1.85 means they have ₹1.85 for every ₹1 they might need to pay out. This extra cushion helps ensure they can handle unexpected large claims.
6. Expense Ratio
This shows how much the insurance company is spending on operating costs compared to the premiums they’re earning. It’s like checking how much of a restaurant’s income goes towards rent, salaries, and other running costs.
Example: If ICICI Lombard reports an expense ratio of 30%, it means they’re spending ₹30 on operating expenses for every ₹100 they earn in premiums. A lower expense ratio generally indicates more efficient operations.
7. Net Retention Ratio
This metric shows how much risk the insurance company keeps for itself versus how much it passes on to reinsurance companies. It’s like seeing how much of the weight a person chooses to carry themselves versus asking friends to help.
Example: If Bajaj Allianz has a net retention ratio of 75%, it means they’re keeping 75% of the risk (and premiums) for themselves and passing 25% to reinsurers. A higher ratio can mean more potential profit, but also more risk.
8. Incurred Claims Ratio
The ratio of claims incurred (including reserves) to premiums earned. This ratio differs from the. Loss Ratio, Incurred Claims Ratio includes both paid and incurred-but-not-reported (IBNR) claims, and claims reserves, while Loss Ratio considers only paid claims
Example: HDFC General Insurance’s incurred claims ratio of 65% indicates they incurred ₹65 in claims for every ₹100 earned.
9. Persistency Ratio
This shows how many customers keep their policies active by continuing to pay premiums. It’s like a loyalty score for the insurance company.
Example: Max Life Insurance reported an 84% 13th month persistency ratio. This means 84 out of 100 customers were still with them after the first year, which is a good sign of customer satisfaction.
10. Claim Settlement Ratio
This tells you how many claims the company pays out compared to the total number of claims made. It’s an important trust factor for customers.
Example: HDFC Life’s 99.6% claim settlement ratio means they paid almost all the claims made by customers. This high percentage can give potential customers confidence that their claims will be honored.
11. Investment Yield
Insurance companies invest the premiums they collect to earn extra money. This metric shows how well those investments are performing.
Example: SBI Life’s investment yield of 9.03% means they’re earning a good return on their investments, which helps keep the company financially strong and potentially offer better rates to customers.
12. New Business Premium
For life insurance companies, this represents the premiums from new policies sold. It’s a sign of how well the company is growing its customer base.
Example: ICICI Prudential Life’s new business premium grew by 10% to ₹15,038 crore, indicating they’re successfully attracting new customers and expanding their business.
10. Digital Adoption Rate
This shows how many customers are using the company’s online services instead of traditional paper-based or in-person methods.
Example: ICICI Lombard processed 94% of their claims digitally, suggesting they’re making it easier and faster for customers to file and receive claims.
11. Net Promoter Score
It provides a direct measure of customer satisfaction and willingness to recommend the company to others. A high NPS can lead to increased customer retention, positive word-of-mouth marketing, and ultimately, improved business growth. By tracking NPS over time, insurance companies can identify areas where they excel and where they need to improve, such as claim processing, customer service, or product offerings. This information can be used to make data-driven decisions and enhance the overall customer experience.
Insurance companies typically collect NPS data through customer surveys. These surveys are often sent out after a customer has interacted with the company, such as after filing a claim, renewing a policy, or receiving customer service. The survey usually includes a single question asking the customer to rate their likelihood of recommending the company on a scale of 0 to 10.
