What is Solvency Ratio in Insurance: Meaning, Formula & Types

What is a Solvency Ratio?

Understanding Solvency Ratios

What are the Types of Solvency Ratios?

Solvency Ratios vs Liquidity Ratios

Solvency ratio and liquidity ratio are somehow similar in nature but have their fundamental differences. These are two very significant metrics that reflect a company's financial health. The key difference is that the solvency ratio focuses more on long term obligations, and the liquidity ratio focuses on short term goals. 

Here is a table of comparison between solvency ratio and liquidity ratio:

Solvency Ratio Liquidity Ratio
Reflects long term stability Reflects short term stability
Takes into account all assets and inventory Focuses on cash and similar assets
A company with a high solvency ratio can cover long term obligations well but how well it will be able to perform under sudden needs is uncertain. A company with a high liquidity ratio can confidently cover sudden crunches but how well it can tackle long term obligations is uncertain.

What are the Limitations of Solvency Ratios?

How is Solvency Ratio Calculated?

FAQs About Solvency Ratio in Insurance

What is IRDA’s Mandate on the Solvency Ratio of Insurance Companies?

As per IRDA’s mandate, insurance companies must maintain a minimum solvency ratio of 1.5. It indicates that the company is in a position to meet its long-term liabilities. 

What is the Solvency Margin?

The solvency margin is an additional amount of capital an insurance company must keep as a backup plan for emergencies. It should be above the value of the claims that the company will most likely incur. 

How Crucial is the Solvency Ratio for an Insurance Company?

A high solvency ratio means the insurer has higher chances or assurance of settling your claims. This helps a policyholder put their faith in you rather than all the other options available in the market.