Solvency Ratio - Definition & How Is It Calculated? | ICICI Pru Life (2024)

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Solvency Ratio - Definition & How Is It Calculated? | ICICI Pru Life? ›

Solvency Ratio is a measure of capital adequacy. It is expressed as a ratio of Available Solvency Margin to Required Solvency Margin. The excess of assets⁶ over liabilities⁷ and other liabilities of policyholders' funds and shareholders' funds maintained by the insurer is referred to as Available Solvency Margin (ASM).

Solvency Ratio = (Net Income + Depreciation) / Liabilities

The solvency ratio formula compares a company's cash flow against the money it owes as the total sum assured.

Debt to Capital Ratio = Total Debt ÷ Total Capitalization. Solvency Ratio = Total Assets ÷ Total Long-Term Debt.

The solvency ratio was 196.5% at December 31, 2023 against the regulatory requirement of 150%. insurance company. It is computed as the sum of annualised first year premiums on regular premium policies, and ten percent of single premiums, written by the Company during any period from new retail and group customers.

As per the Insurance Regulatory and Development Authority of India (IRDAI),every health insurance company must maintain a minimum solvency ratio of 1.5. In the year 2022-23, star health insurance has a solvency ratio of 2.03.

Thus, solvency ratio indicates whether the company's cash flow is adequate to pay its total liabilities. Amount (in Rs.) Then, if we use these numbers into the formula given above, we get: Solvency ratio = (15,000 + 3,000) / (32,000 + 60,000) = 19.6%.

To calculate the figure, divide the company's profits (before subtracting any interests and taxes) by its interest payments. The higher the value, the more solvent the company. In other words, it means the day-to-day operations are yielding enough profit to meet its interest payments.

A solvency ratio of 30% is quite excellent and indicates a very healthy financial position of the company. It assures the investors and the shareholders that the company can repay their financial obligations with ease and are not cash-strapped.

Which insurance company has best solvency ratio in India? ›

A solvency ratio is a vital metric used to see a business's ability to fulfil long-term debt requirements and is used by prospective business lenders. It shows whether a company's cash flow is good enough to meet its long-term liabilities. It is, therefore, considered to a measure of its financial health.

Bajaj Allianz Life Insurance has registered the highest solvency ratio of 5.81, as per Irdai data.

To make the judgement easy, the IRDAI has mandated all insurance companies to maintain a minimum solvency ratio of 1.5 to excess assets over liabilities, termed the Required Solvency Margin. * Get to know the key terms in life insurance.

Solvency ratios measure a company's ability to meet its future debt obligations while remaining profitable. There are four primary solvency ratios, including the interest coverage ratio, the debt-to-asset ratio, the equity ratio and the debt-to-equity ratio.

A solvency ratio is a vital metric used to see a business's ability to fulfil long-term debt requirements and is used by prospective business lenders. It shows whether a company's cash flow is good enough to meet its long-term liabilities. It is, therefore, considered to a measure of its financial health.

Expense Ratio = Expenses / Premium Combined Ratio = (Losses + Expenses) / Premium = Loss Ratio + Expense Ratio Underwriting Profit = 100% – Combined Ratio Example: Loss Ratio = 70% (ratios may be expressed as a % or a decimal; either is correct) Expense Ratio = 25% Combined Ratio = 95% I.e. 95% of premium is used to ...