What is Solvency Ratio in Term Insurance

The solvency ratio term insurance indicates the insurer’s financial health and ability to pay claims. You can use it to check whether the company can meet its obligations, like a bank’s capital adequacy ratio. Besides checking the claim settlement ratio (CSR), you must also check the insurer’s solvency ratio while buying term insurance plan.

As per IRDAI mandate, you must go for an insurer that maintains a minimum of 1.5 solvency ratio. In terms of solvency margin, the value is 150%. The solvency margin is the extra capital the insurer must hold over and above the claim amount they are likely to incur.

How To Estimate the Solvency Ratio?

You can easily use the solvency ratio insurance formula to calculate a term insurance company’s solvency ratio.

Solvency Ratio = (Net Income + Depreciation) ÷ Liabilities

The numerator shows the insurer’s current cash flow, and the denominator indicates its short-term and long-term liabilities. A higher solvency ratio means that the insurer has more assets than obligations and is more likely to be able to pay claims. On the other hand, less than one solvency ratio indicates an insurer’s financial weakness.

What is the Solvency Ratio of Term Insurance Companies?

Here is the IRDAI released list of solvency ratios of life insurance providers in India for the financial year 2022-23:

As per the IRDAI mandate, insurance providers must maintain a 1.5 solvency ratio. According to the IRDAI report for the FY 2022-23, these are the three top insurance providers with the highest solvency ratio.

• Bajaj Allianz Life Insurance - 5.2
• Pramerica Life Insurance - 4.1
• Ageas Federal Life Insurance - 3.1

Why is the Solvency Ratio in Term Insurance Important?

There are some factors you must check while buying term insurance, one of which is the company’s solvency ratio. It shows the insurer’s financial stability and the company’s overall liabilities. The ratio helps you choose an insurance provider that is more likely to fulfill its debt and other commitments when the time comes.

• The higher the solvency ratio, the better it is for you because it shows that the company is financially stable and less likely to face insolvency.
• On the other hand, a low solvency ratio means that the company might struggle to pay out claims when there are a lot of claims to settle.
• Each year, insurers receive innumerable claims. So, paying claims and taking care of them requires suitable financial capabilities.

Let’s understand that with an example:

• Rakesh bought a term insurance policy from an ’X’ insurer.
• In the 8th policy year, Rakesh meets with an accident and unfortunately dies.
• So, as promised, the insurer has to pay a sum assured amount as the death benefit to his nominee.
• If the ’X’ insurer’s solvency ratio is low, it might struggle to pay out claims when there are a lot of claims to settle.
• Therefore, to ensure a hassle-free claim settlement in your absence, you must check the solvency ratio of the insurance providers.

Conclusion

While searching for the best insurance providers, you must check out a company’s solvency ratio to make a wise decision. It doesn’t guarantee the insurer’s future performance but surely helps you find the company’s current financial stability.

If you’re in search of the best term insurance plan or savings plan, you can talk to our insurance advisor for free personalized assistance. To do so, you can easily contact us through the website Policyx.com or call us at 1800-4200-269.