Whenever we buy anything from private insurance companies, we think twice! Our main concern is that the company, we are going to invest will be there after 5-10 years down the line and also will it be able to pay the insurance proceed at the time of claim. The above concern is very much relevant in the current age of globalisation and increasing no of companies and back gone bankrupt in the past few years.
Increasing number of insolvent insurance companies
1. Garantie Mutuelle des Fonctionnaires in France in 1993, Mannheimer Leben in 2003
2. Nissan Mutual Life in 1997, Chiyoda Mutual Life Insurance Co. and Kyoei Life Insurance Co. in 2000, Tokyo Mutual Life Insurance in 2001
3. First Executive Life Insurance Co. in 1991, Conceso Inc.in 2002
Maintenance of solvency margins of Insurers as per IRDA India
In India the insurance regulatory watchdog IRDA have Solvency Margin Regulations. Every insurer is required to maintain a Required Solvency Margin as per Section 64VA of the Insurance Act 1938. Every insurer shall maintain an excess of the value of assets over the amount of liabilities of not less than an amount prescribed by the IRDA, which is referred to as a Required Solvency Margin. The IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations, 2000 describe in detail the method of computation of the Required Solvency Margin.
What is Solvency Ratio?
The solvency of an insurance company corresponds to its ability to pay claims. The Solvency ratio is a way investors can measure the company’s ability to meet its long term obligations.
Solvency Ratio = (After Tax Profits + Depreciation)/(long term liabilities + Short term liabilities)
- In the case of Life Insurers, the Required Solvency Margin is the higher of an amount of Rs.50 crore (Rs.100 crore in the case of Re-insurers) or a sum which is based on a formula given in the Act / Regulation.
- In the case of General Insurers, the Required Solvency Margin shall be the maximum of the following amounts:
- Fifty crore of rupees (one hundred crore of rupees in the case of Re-insurer) ; or
- A sum equivalent to twenty per cent of net premium income; or
- A sum equivalent to thirty per cent of net incurred claims, subject to credit for re-insurance in computing net premiums and net incurred claims being actual but a percentage, determined by the regulations, not exceeding fifty per cent.
If the insurer miss the above solvency margin?
The insurance companies may have to inject additional capital to maintain the regulatory requirements if they won’t maintain solvency margins.
Is the higher solvency ratio is good?
The higher the ratio is the better equipped a company is to pay off its debts and survive in the long term. In general a ratio of 20% or higher is considered to be a good ratio where as a ratio of 20% or lower is considered to be a bad ratio. As most ratios this should be compared with other companies in the same industry group.
Where to find Solvency Ratios of my life insurance company?
You can check it at www.irda.gov.in. IRDA India publish annual report on solvency margins of all the insurance companies operating in India.