Why Solvency Ratio is Important Indicator of Life Insurance Companies?

Apart from Claims Settlement Ratio (CSR) and Turnaround Time (TAT), you should also check the Solvency Ratio of the insurers when selecting an insurer to buy a policy. Take a look at what it is and why is it so crucial-

The solvency ratio is a measurement of a company’s cash flow and its liabilities. In simple words, it helps you know whether or not the company has adequate funds to manage its short-term and long-term liabilities.
A low solvency ratio means that the company might find it difficult to manage its financial obligations and default payments.Conversely, if the solvency ratio is high, it means that the company has adequate funds to manage its financial obligations. A higher solvency ratio is generally considered a sign of trustworthiness.

The solvency ratio considers the solvency margin of a company. The solvency margin compares the liabilities of a company against its current assets. Technically put, the solvency ratio is calculated by dividing the after-tax operating income of a company with its debt liabilities.The formula for the same is- Solvency Ratio = (Net Income + Depreciation)/Liabilities

You purchase life insurance to safeguard the financial future of your family. By purchasing a life Insurance policy , you agree to pay the policy premiums, and the insurer secures your life with an assured sum in return. In case of your unfortunate demise, the insurer will pay the sum assured to the policy beneficiary.But insurers receive hundreds of claims from their customers regularly. To process all these claims and pay the monetary benefit to the beneficiaries, the company needs to be financially stable and have adequate funds. The solvency ratio is a simple indicator to know how good or bad the financial strength of an insurer is.An insurer with a high solvency ratio has more chances of fulfilling its commitment of paying your beneficiary the sum assured in case of your demise.

As the solvency ratio is such a crucial indicator, IRDAI has made it mandatory for all the insurers to have a solvency ratio of at least 1.5 and a solvency margin of 150%. In other words, insurers should mandatorily have at least 50% additional financial resources above their current liabilities.IRDAI also closely tracks the solvency ratio of all the life insurance providers in the country. Information about the same can be found on the official IRDAI website.

A life insurance policy is of no use if the beneficiary is unable to receive the death benefit or if the payment is delayed for several months or years. While the solvency ratio does not offer any guarantee of the future performance of an insurer, it sure is a vital indicator of its current financial strength.If you are looking for a top insurer, do check the solvency ratio on the official website of the insurer or the IRDAI website to make the right decision.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.