Solvency Ratio in Term Life Insurance

Term insurance, a pure and simple life insurance product helps to protect your loved one’s financial stability in case of an unforeseen event. So, choose an insurer with care and after in-depth research. While buying term insurance from any company, you should ensure that your insurance company is reputable, trustworthy, and will offer financial help to your family in emergencies. 

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Keeping all the factors in mind, one of the major parameters to consider is the Solvency Ratio of Term Life Insurance Companies. Let’s discuss why this factor matters and how this ratio helps in choosing the right insurer.

What is a Solvency Ratio of Term Insurance Companies in India?

The Solvency Ratio measures the cash flow of the company and the insurer’s liabilities. Simply put, it helps you determine whether or not the insurer has sufficient funds to manage its short-and long-term liabilities.

A low solvency ratio simply means that the insurer finds it difficult to manage default payments and financial obligations. On the contrary, if the solvency ratio of a company is high, the insurer has sufficient funds to manage its financial commitments. This means, high solvency ratio usually indicates that the company is financially stable and has adequate capital to pay all the applicable claims.

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

Raj purchased a term insurance plan from X insurer. The company promises to pay a pre-specified amount to his/her nominee in case of an unforeseen event. Now, just consider the case of a natural disaster like flood, earthquake, tsunami, etc. Because of these events, the company may face a high number of death claims than expected.

In such cases, the ability of the company to settle the death claims purely depends on its financial ability or solvency. So, the solvency of an insurance company shows its financial health/ability to meet its long-term debt obligations.

Five things to know before buying Term Plan Five things to know before buying Term Plan

How To Calculate Solvency Ratio?

The formula for the Solvency Ratio is:

Solvency Ratio = (Total Income + Depreciation) / Liabilities

The formula for solvency ratio measures the cash flow of a company in comparison to the money it owes as the total sum assured. The more the assets are against the liabilities, the high is the solvency ratio will be.

Why Solvency Ratio of Term Life Insurers is Important?

Term insurance protects the financial future of your loved ones. By buying a term insurance plan, you as a policyholder promise to pay the premium amounts on time. Then, in return, the insurer provides you a life cover that helps secures your family’s future. In case of your unforeseen death, the insurance company will pay the sum assured amount to the beneficiary/nominee of the policy.

However, term life insurance companies receive several claims from their customers regularly. So, the company needs to be financially stable and have enough funds to process all the death claims and pay the financial benefit to the nominees.

As discussed, the Solvency Ratio helps in knowing the financial strength of the company, whether it is good or bad. Thus, to secure your loved ones and ensure that the sum assured amount will be paid in difficult times, you should look for insurers having a high solvency ratio.

What is IRDAI Mandate on Solvency Ratio?

Now as we all know that Solvency Ratio is a crucial factor to take care of when choosing a term insurance company. IRDAI has made it compulsory for all insurance companies to have at least a 1.5 solvency ratio and a 150% of solvency ratio margin**.

The solvency ratio of all life insurance companies can be closely tracked by IRDAI. Detailed information can be easily found on the IRDAI’s official website.

**Note: Solvency margin is the additional capital the insurers should hold over and above the amounts of death claims they are possible to incur. It functions as financial support in extreme cases, allowing the insurer to settle all death claims.

IRDAI publishes the solvency ratio every quarter i.e., in June, September, December, and March.

Solvency Ratio of Life Insurers as per IRDAI Annual Report 2020-21
Term Life Insurance Company June 2020 Sep 2020 Dec 2020 March 2021
Aditya Birla Sun Life 1.83 1.76 1.70 1.80
Aegon Life Insurance 2.34 2.92 2.68 2.41
Ageas Federal Life Insurance 3.29 3.32 3.48 3.40
Aviva Life Insurance 2.48 2.42 2.50 2.24
Bajaj Allianz Life Insurance 7.60 7.30 7.08 6.66
Bharti AXA Life Insurance 1.95 1.76 1.84 1.78
Canara HSBC OBC Life Insurance 3.49 3.12 2.89 3.27
Edelweiss Tokio Life Insurance 2.39 2.16 2.19 2.15
Exide Life Insurance 2.13 2.16 2.17 2.24
Future Generali Life Insurance 1.72 1.56 1.60 2.03
HDFC Life Insurance 1.90 2.03 2.02 2.01
ICICI Prudential Life Insurance 2.05 2.06 2.26 2.17
IndiaFirst Life Insurance 1.80 1.78 1.67 1.81
Kotak Mahindra 3 3 3.01 2.90
Max Life Insurance 2.12 2.07 2.06 2.02
PNB MetLife 2.04 1.97 1.94 1.90
Pramerica Life Insurance 3.87 4.20 4.29 4.42
Reliance Nippon Life Insurance 2.07 2.14 2.46 2.45
Sahara India Life Insurance 9.33 9 8.85 9.26
SBI Life Insurance 2.39 2.45 2.34 2.15
Shriram Life Insurance 2.09 2.18 1.95 1.80
Star Union Dai-ichi Life Insurance 2.53 2.37 2.27 2.06
Tata AIA Life Insurance 2.14 1.98 2.05 2.04
LIC 1.60 1.65 1.64 1.76

Wrapping It Up!

If you are searching for a best-term insurance company in India, always check the solvency ratio on the insurer’s or IRDAI’s official website to make an informed decision.

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