Introduction
The Insurance Solvency Ratio is a long-term measure of an insurance firm’s or a service provider’s financial position.
In this blog, let us discover detailed insights into how the Insurance Solvency Ratio can be calculated and how insurance companies help policyholders meet out their long-term obligations in a neat and streamlined manner.
Helping you get started further on the concept:
What Is Insurance Solvency Ratio and how can it be calculated?
The Insurance Solvency Ratio is a measure that clearly showcases how an insurance company survives even during critical business circumstances.
Here, we look at an insurance firm’s ability to meet long-term financial obligations of policyholders on a comprehensive scale indeed.
The Solvency ratio clearly defines the insurance company’s capital adequacy and further tells us about the ability of the firm to pay off the claims that are made by policyholders in lieu of different insurance policies they take from your firm as such.
The Formula for calculating the Insurance Solvency Ratio of an insurer is as follows:
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Here, the available capital refers to the amount of capital your firm has to clear off potential liabilities on time. The required capital refers to the level of capital requirement your firm needs to fulfill the financial obligations of policyholders even in worst-case scenarios.
The higher the solvency ratio is, the better is the financial stability of the insurer.
Importance of a solid Insurance Solvency Ratio
Here are the set of reasons that outline the importance a solid insurance solvency ratio has over helping an insurance brand build its trust and credibility among its consumers.
Helping you through with a run-down on pointers with respect to the same:
It is a question of sustainability
It is mandatory for insurance companies to maintain a level of solvency ratios to ensure that policy claim amounts are settled with policyholders even in worst-case scenarios.
Regulatory authorities like the European Insurance and Occupational Pensions Authority or the EUOPA and the US National Association of Insurance Commissioners or the NAIC that set minimum benchmarks for insurance solvency ratios that are required to be maintained by insurance companies at any given point of time.
In a nutshell, maintaining a fair insurance solvency ratio is a matter of sustainability for an insurance firm as such.
Helps build confidence of investors
When an insurance firm maintains a robust level of solvency ratios, it builds a sense of trust and credibility amongst investors and stakeholders who would want to take up insurance policies or buy shares of insurance companies on a more comprehensive scale indeed. Therefore, positive solvency ratios builds trust and confidence on the minds of consumers who would want to sign up with insurance firms.
Helps build a better consumer base
A stronger solvency ratio reinforces trust in the minds of existing policyholders that their claims would get settled and the insurers shall ensure timely remittances of claim amounts even during worst-case scenarios such as natural calamities or disasters.
The existing consumers can then refer their friends and business colleagues to this insurance firm as such. Therefore, you can build your consumer base by a massive level when you focus your efforts on maintaining a strong solvency ratio as such.
Factors that impact solvency ratios
These are the different set of factors that impact solvency ratios of insurance companies. Let us have you covered with a run-down of pointers that are connected with the same:
Investment Portfolio
The volatility of insurance investments can impact the level of solvency ratio a company can maintain on the whole.
This is because when insurance products or share values rise or plummet in the markets by inconsistent margins, then the market volatility increases the risk the insurance products have.
This way, the available capital that is left available with the insurer might get impacted adversely. Therefore, investment portfolios have a great impact on how solvency ratios appear at any given point of time.
Claims History
A sudden surge or rise in the number of claims submitted by policyholders can impact the solvency ratio of an insurance firm by a greater extent indeed. Therefore, an insurance firm must have an overall control over the number of claims it receives from policyholders vis-a-vis its subscriptions it receives through premium remittances. The insurance firm must strike a neat balance between the two.
Reinsurance
In a reinsurance, your firm buys insurance policies from different other firms to keep your brand sustainable. Therefore, in this scenario, your solvency ratio is hit by a major extent.
Changes in overall economic scenarios
Changes in prices of insurance stocks and interest rate changes impact the market volatility to a greater extent. Therefore, your insurance stocks become dearer for investors or shareholders to procure them and this way, your overall solvency rates can take a hit.
When there is a change or shift in governmental rule, the regulatory authorities can bring about a newer spree of rules and regulations and your firm might find it more difficult to adapt to these changing circumstances if your solvency ratio does not support you with the same.
Other financial indicators you find in the emerging insurance sectors
Apart from solvency ratios, you also have other financial indicators that reveal the operational efficiency or managerial efficiency of an insurance firm or enterprise. Let us have a run-down into what these indicators are:
A- Liquidity Ratio
A liquidity ratio determines the short-term payment obligations of an insurance industry while a solvency ratio measures the long-term financial obligations of the insurance industry.
B- Claims ratio
A Claims ratio determines the claims made by policyholders in tangent to premium sums received by the insurance firm. This is an indicator to measure the operational efficiency of your firm as such.
Future Trends that can impact how solvency ratios of insurance firms
These are the future trends that can impact the solvency ratios of most insurance companies. Let us have a run-down of pointers that are connected with the same:
Making inroads to digital transformation
The advent of internet and technology is taking insurance industry by storm. You can introduce automated AI pioneered bots to calculate risk assessment ratios and manage premium subscriptions vis-a-vis claim handling processes. This way, you get a better degree of accuracy into the way the operations are being handled. By doing so, you can improve the solvency ratio of your firm considerably.
Climate insurgency
Today, we have hordes of climatic changes that are changing the way we humans operate. Take the case of COVID 19. We had offices, schools and colleges that were shut down for 3-4 years in a row.
When we see more of such natural or man-made disasters, the claim handling teams would have a tough time settling claims from natural disaster coverage policies. The solvency ratios of major insuance firms might take a hit with claims exceeding premiums.
Capital and risk management innovation
Thanks to AI and power engineering, the capital and risk management operations are automated using sophisticated software and insurance companies are predominantly making use of the same. By doing so, human intervention is reduced considerably and you can expect more accurate resolutions to operational contingencies leading to spiked up solvency ratios for your firm.
How do policyholders get better insights with solvency ratios?
Here are insights into how policyholders capitalize wih insurance solvency ratios. Taking you through with a run-down of pointers that are connected with the same:
Getting better awareness on how insurers work
When you know how to grade an insurance company using solvency ratios, you can easily use this metric as a key differentiator to identify well-performing insurance service providers with the not-so-well-performing ones. This way, your research is done easier and faster.
Knowing implications better
A higher solvency ratio indicates that your insurer is doing erally well. When you find that the insurer’s ratio is dipping, now is the time for you to make the next optimal switch indeed. Therefore, this is a powerful metric that helps you analyze your futuristic implications in a more comprehensive manner.
The Bottom Line
A healthy solvency ratio not only helps policyholders choose the right insurance service providers but also helps other insurance firms or stakeholders acquire or merge insurance companies with their own brands.
A simple ratio therefore helps shareholders, policyholders and stakeholders inside an insurance domain. What are your thoughts on this? Do mention it on the comments below!
Frequently Asked Questions or FAQs
When a life insurance company has a high solvency ratio would you procure equity shares from this firm?
Answer: Yes, when the insurance firm has a high solvency ratio, then the equity ratio of the firm would be better as compared to debt. Therefore, this is a firm you would want to procure shares or other equity-based assets from.
Do insurance companies in India have a regulatory authority to manage solvency ratios?
Answer: Yes, you do have regulatory authorities that set benchmarks for interest coverage ratio, solvency ratio and claims handling ratio to ensure managerial and operational efficiency of insurance companies that are based out of India.
How do you calculate the debt-to-equity ratio in an insurance firm?
Answer: The debt-to-equity ratio is calculated by dividing the company’s total liabilities with shareholders equity in the insurance company. This is done to know how effectively is the insurance company able to handle equity debt of shareholders.
What does a low solvency rate of an insurance firm imply?
Answer: When the insurance provider has a low insolvency ratio, it implies that it has long-term debt surpassing premium remittances or earnings from sale of insurance stocks or shares. The low solvency ratio also implies that the ability to pay claims to policyholders by the insurance firm is lesser as compared to a firm that has a more stable solvency rate.
Can you also deem a finance organisation or a deposit company by a solvency ratio as being fit or healthy?
Answer: Yes, good solvency ratios for a finance company or a deposit firm also term good credibility of the brand amongst its consumer base. A solvency marginof 1.5 x times better over another firm helps a company handle mergers or acquisition deals as well.
