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.
What we need to check in solvency ratio?
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 should be compared with other companies in the same industry group.
What is the minimum Solvency Ratio requirement?
1- 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.
2- General Insurers – the Required Solvency Margin shall be the maximum of the following amounts –
(a) Fifty crore of rupees (one hundred crore of rupees in the case of Re-insurer) ; or
(b) A sum equivalent to twenty per cent of net premium income; or
(c) 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 solvency margin?
The insurance companies may have to inject additional capital to maintain the regulatory requirements if they won’t maintain solvency margins.
Life Insurers Solvency Ratios for FY 2005-06