Solvency Ratio in Life Insurance
What is solvency ratio or solvency capital?
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). IRDAI requires all insurers to maintain a minimum excess assets over liabilities, which is referred to as Required Solvency Margin (RSM).
IRDAI mandates a minimum solvency ratio of 150%.
A high solvency ratio instils confidence in the ability of the Company to pay claims, meet future contingencies and business growth plans.
How to Calculate Solvency Ratio?
Below is the solvency ratio formula:
Solvency Ratio = (Net Income + Depreciation) / Total Liabilities (Short-term + Long-term Liabilities)
Here’s an example to understand this:
- Net income: ₹ 1 lakh
- Depreciation: ₹ 30,000
- Total liabilities: ₹ 7,00,000
- Solvency Ratio = (₹ 1,00,000 + ₹ 30,000) / ₹ 7,00,000 = 0.1857 or 18.57%
Why is it important to check the Solvency Ratio in Insurance?
The solvency ratio provides a clear picture of an insurance company's overall financial health. Monitoring it can help both the policyholder as well as the insurance company. Here are some reasons why solvency ratio is important:
Indicator of Insurer's Financial Stability
The solvency ratio helps you understand the company’s liabilities, cash inflows and outflows. It gives you a glimpse into the company’s financial stability.
Regulatory Compliance
The Insurance Regulatory and Development Authority of India (IRDAI) is the body responsible for setting up regulations for Insurance companies. One of the parameters that the IRDAI regulates is having a minimum solvency ratio for Insurance companies. The solvency ratio helps you know whether the company can manage its financial responsibilities effectively.
As per the existing IRDAI mandate, all insurance companies need to maintain a solvency ratio of 1.5 or a solvency margin of 150%. This is the basic requirement so that the interests of all policyholders are safeguarded.
Risk management & Capital adequacy
A high solvency ratio signifies a company's stability, reliability and long-term financial security. Monitoring it can help assess the company’s risk exposure and spot signs of inadequate capital management.
Assurance of Claim Settlements
A financially stable insurance company is less likely to face insolvency. As a result, your claim is less likely to be rejected, and you are less likely to lose money.
Comparing Insurance providers
The solvency ratio is an essential parameter used to compare insurance providers. It helps you choose a suitable, reliable provider.
Types of solvency ratios
Below are the different types of solvency ratios:
Interest coverage ratio
Formula:
Interest Coverage Ratio = Earnings Before Interest and Taxes (EBIT) ÷ Interest Expenses
This interest coverage ratio shows whether a company may cover its current interest payments with its earnings. A higher ratio may indicate a better financial health.
Debt-to-assets ratio
Formula:
Debt-to-Assets Ratio = Total Liabilities ÷ Total Assets
The debt-to-assets ratio measures what portion of a company’s assets are financed through debt. A higher ratio suggests greater financial risk, as more of the company’s assets may be used for repaying debt.
Equity ratio
Formula:
Equity Ratio = Shareholder’s Equity ÷ Total Assets
The equity ratio reflects how much of a company’s assets are financed by equity rather than debt. A higher equity ratio indicates that the company has adequate financial cushion against liabilities.
Debt-to-equity (D/E) ratio
Formula:
Debt-to-Equity Ratio = Total Debt ÷ Shareholder’s Equity
This debt-to-equity ratio shows how much outstanding debt a company uses to finance its operations. A higher debt-to-equity ratio may indicate higher risk and more dependence on debt.
How to Check the Solvency Ratios of Insurance Companies?
Below are some ways to check the solvency ratio of an insurance company:
Insurer’s Annual Report
All insurance companies publish an annual report that contains the solvency ratio. You can check this report on their website before selecting an insurance provider.
IRDAI Website
The IRDAI publishes solvency ratios of insurance companies on their websites. You can directly visit IRDAI’s website to compare the ratios of multiple insurers.
Financial rating agencies
Financial rating agencies also publish solvency ratios of insurance companies. You can refer to the websites of these companies.
Conclusion
The solvency ratio that life insurance companies declare every quarter reflects their ability to honour their promise of sum assured in case of an unfortunate event.
Also, to cover your family’s current and future financial needs, you need a term insurance plan. The affordable premiums allow you to buy a large coverage for your family regardless of your budget.
ICICI Prudential Life declared a solvency ratio of 212.2%1 at March 31, 2025, well over the IRDAI’s regulatory requirement. Moreover, our claim settlement ratio (CSR) in FY2024 was 99.3%2. This ratio also establishes our commitment to our customers and their loved ones.
Hence, to ensure your family is always financially secured, it is crucial to take charge of your financial life and start investing with the right insurance provider.
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