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Solvency Ratio in Life Insurance

TeamAckoMay 13, 2024

There are different types of life insurance policies in the market that are offered by different insurers. Thankfully, you can buy insurance online; so, you don’t have to spend too much time and effort researching an insurer. However, there are some things you need to check before finalising an insurer, such as the Solvency Ratio. In this article, we explore the concept of solvency, what it is, and how it pertains to the insurance industry.

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What is a Solvency Ratio? 

An insurance company's Solvency Ratio (SR) is a ratio that measures their financial health and outstanding amounts such as debts or liabilities. You can use the SR to find out if your preferred insurance company is financially sound and if they can make your payments when they're due. 

  • Insurance companies with low Solvency Ratios may be struggling with money and could delay payments or not pay you or your family at all!

  • On the other hand, insurance companies with high Solvency Ratios are financially capable to pay you and your family the Sum AssuredMoney Back PolicyLife insurance Death Benefit, or other payments.

Why is Solvency Ratio important in life insurance? 

The Solvency Ratio of your preferred insurance company is a critical criteria to consider to find out if they can or cannot pay their outstanding amount to you or your beneficiaries. A SR lets you know if your insurance company can carry out their financial responsibilities and settle claims. Ideally, you should be looking to purchase policies from companies with a high SR to guarantee that you will get your money back in policies such as Money Back Policy or Pension Plans, or that your family will get your death benefit or sum assured. The Insurance Regulatory and Development Authority of India (IRDAI) scrutinises insurance companies' Solvency Ratios to protect policyholders and their families. There is a Required Solvency Margin (RSM) that the IRDAI enforces, which is a safety cushion that goes beyond the liabilities. According to the IRDAI, insurance companies should have an RSM above their Minimum Solvency Ratio of 150%.

How is a Solvency Ratio calculated?

An insurance company's Solvency Ratio can be determined by calculating their assets against their liabilities. The SR value shows you the insurance company's financial status and if their assets or liabilities are keeping the company afloat.

  • Dividing the insurance company's liabilities against their assets uncovers their Solvency Ratio. 

  • Solvency Ratio = (Net Income + Depreciation) ÷ Liabilities 

  • This calculation can tell you if your insurance company will be able to pay you or your family your payments on time.

Types of Solvency Ratios in life insurance

There are 4 types of Solvency Ratios that financial professionals use to determine an insurance company's finances. Here’s a list.

Debt-to-assets Ratio

The Debt-to-Assets Ratio calculates how much debt an insurance company has in contrast to their assets or earnings. It can be calculated by dividing an insurance company's liabilities by their assets.

Interest Coverage Ratio

This calculates if and how the insurance company's use their interest in payouts.

Equity Ratio

An Equity Ratio calculates the insurance company's finances through their assets to determine if they can pay their debts. This is crucial in determining if the company will have any money left over after paying outstanding amounts, to pay you and your family your life insurance dues.

Debt-to-Equity (D/E) Ratio

Finally, we have the Debt-to-Equity ratio that calculates an insurance company's debt in contrast to their equity or earnings. This value is determined by dividing the insurance company's debt by their total earnings.

How can I find an insurance company's Solvency Ratio?

If you want to learn more about an individual insurance company's Solvency Ratio, you can use the following steps.

From the IRDAI

You can check out the IRDAI's website for more information about an insurance company’s Solvency Ratio. When you visit the IRDAI page, you can look up the specific insurance company from the list of insurance companies in India. Next, you can find the insurance company's yearly report with the most recent financials.

From the insurance company's website

You can get in touch with your insurance company for more details about their finances or check the company's website or investor relations section for information about its SR. It's important to note that the Solvency Ratio of an insurance company can fluctuate over time, so it's vital to check the most recent information available. Additionally, it's a good idea to compare the Solvency Ratios of different insurance companies to get a better sense of their relative financial health.

Is Solvency Ratio the only measure of an insurance company's finances? 

Even if an insurance company has a high Solvency Ratio, you can't base the company's financial health on this criteria alone. In addition to Solvency Ratios, you should look at the insurance company's finances from a holistic viewpoint. Consider their Solvency Ratio, their money management techniques, and how their organisation stands up to competitors in the insurance market. You can compare insurance companies based on their Claims Settlement Ratio, Solvency Ratio, and financial background to get a clearer picture.

Frequently Asked Questions

Here’s a list of common questions and answers related to Solvency Ratio in life insurance.

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What is an insurance company’s Solvency Ratio a measure of? 

It is the measure of the insurer’s finances. This amount is critical to determining if they can pay your life insurance payouts to you. You should look for companies with high Solvency Ratios, because they are financially sound and can pay you or your family in the future. 

How to go about determining the Solvency Ratios?

The general calculation can be done as follows: Solvency Ratio = (Net Income + Depreciation) ÷ Liabilities. 

Which is better, a high or low Solvency Ratio? 

A high Solvency Ratio is better, because it tells you that you can trust the insurance company to pay you, or your family, your life insurance dues. A low Solvency Ratio means that the company may not be able to pay you out in the future.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on industry experience and several secondary sources on the internet, and is subject to changes.

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