Why is the Solvency Ratio an important factor in Term Insurance?

What is the Solvency Ratio in Insurance?

The solvency ratio in term insurance measures the company’s ability to cover its long-term loan repayment obligations. It tells the company’s capability to pay off its future liabilities. Using this, you can assess if the company can handle its debt obligations. Therefore, a high solvency ratio is generally considered an indicator of reliability.

Note: Now that you know that what is Solvency Ratio in Insurance, you should also get to know about what is term insurance to buy a term plan for your loved ones.

 How To Calculate the Solvency Ratio? 

The formula for calculating solvency ratio is as follows: 

Solvency Ratio = [Net Income + Depreciation]/ Liabilities 

This formula measures the cash flow of the company in comparison to the sum that it owes as life cover. 

What is the Solvency Ratio of Insurance Companies?

Here is the solvency ratio of insurance companies in India for the financial year 2022-23:

* The above table is updated as per the information available on the IRDAI report of FY 2022-23

Note: It is suggested to calculate the term plan premium on the term insurance calculator online tool by Policybazaar before buying.

Why Solvency Ratio in Term Insurance is Important? 

People buy a term plan to secure the financial future of their family. In terms of insurance, you agree to pay the premium amounts, and the company provides life cover to the nominee in case of your unfortunate death. 

But insurance companies receive multiple claims from their clients on a regular basis. In order to process these claims and pay the financial coverage to the nominees, the insurer requires to be financially secured and have sufficient funds. 

What if the insurance company becomes insolvent? In that case, they might not be able to pay you the sum assured and your loved ones might face financial difficulty in case of an unforeseen demise. Overall, it helps you know how good the financial strength of your company is. 

Let’s understand this with the help of an example: 

Rama purchased a life insurance plan from an insurance company. In the event of her unfortunate death, the insurer promises to pay a sum assured amount as the death benefit to their nominees/beneficiaries. However, if such a situation arises and her nominee files a claim, the insurer may face challenges in fulfilling the payout if its solvency ratio is low. This is particularly concerning given that the volume of claims is consistently high. Therefore, Neha must assess various factors, including the solvency ratio of the insurance company, to ensure her nominee's financial security in her absence.

IRDAI’s Mandate on Solvency Ratio

As per the guidelines of IRDAI, the minimum solvency ratio for insurance companies should be at least 1.5 or 150% in terms of solvency margin. 

Solvency margin is the additional capital the insurers should hold over and above the number of claims they are likely to experience. It is a type of financial backup in risky situations, helping the company to settle all claims. 

Wrapping It Up!

While the solvency ratio doesn’t guarantee the insurer’s future performance, it is an important indicator of its existing financial strength, so if you are looking for the best insurance company, always check the solvency ratio of a company to make a wise decision. 

Note: Check all the best term insurance plan in India.

Note: You should also check the benefits of term life insurance if you are planning to purchase the term insurance plan.

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