Solvency Ratio is a key metric used to determine the ability of a life insurance company to meet its debt and other financial commitments. It is an indicator of whether the company’s income earned via premiums and processing charges is sufficient to meet the short-term and long-term expenses such as payment of insurance cover to the beneficiaries in case of death of the policy holder. Hence, the lower a company’s solvency ratio, the higher are its chances of defaulting on its debt obligations. Conversely, the higher the ratio, better equipped a company is to pay off its claims and survive in the long term. In essence, solvency ratio for life insurance companies refers to its ability to pay claims.
Make sure that you research about the solvency ratio of the company whose life insurance plans you are opting for as is a critical factor that impacts the capacity of life insurance companies to survive in the long term. An insurer is deemed as insolvent if its assets are not enough or cannot be used of in time to pay the claims arising.
Life Insurance Companies in India must abide by the rules and regulations prescribed by Insurance Regulatory and Development Authority of India or IRDAI. Maintaining solvency ratio is also a main regulation to be followed by all the insurance companies in India. According to the IRDAI (Assets, Liabilities, and Solvency Margin of Insurers) Rules 2000, both life and general insurance companies need to maintain solvency margins. Solvency margin refers to the surplus capital that an insurance company is required to hold at any point of time. Life insurance companies are expected to maintain a 150% solvency margin or, all the 24 life insurance companies in India are supposed to maintain 1.50 as solvency ratio. Hence, solvency ratio is an important parameter to choose the best life insurance policy.
Solvency ratios are available in the annual report published on the IRDAI website. All the 24 life insurers have complied with the necessary solvency ratio regulations. The only Public sector life insurance company Life Insurance Corporation of India (LIC), with a solvency ratio of 1.54 which is slightly more than the required ratio. This is because LIC is state owned and one of the oldest operating life insurance companies in India from 1956.
