What Is A Solvency Ratio In Life Insurance?

While we make a variety of investments in our lives to help us meet financial goals, there is one essential investment that possibly trumps them all - life insurance. In the event of your unfortunate demise, your life insurance policy guarantees that your family and dependants will have ample financial coverage to get them through.

However, no two life insurance providers are alike. There are a number of factors that set one insurer apart from the other, with some offering low premiums while others offering various types of covers. But as a life insurance seeker, the prime factor that should matter to you and your beneficiaries is whether your insurer will be able to settle your claims if the day ever arises.

To judge an insurer based on these criteria, life insurance seekers can turn to a factor known as a solvency ratio. Let us discuss this in detail:

What is a Solvency Ratio?

Technically put, the solvency ratio of a company is a measurement of its ability to meet its debt obligations and other financial commitments. Basically, a solvency ratio gives insight into the company’s cash flow as well as whether this cash flow is capable of meeting the company’s liabilities - both long-term and short-term.

The understanding with this metric is that the lower a company’s solvency ratio, the higher the likelihood that the company will default on its financial obligations. Conversely, a company with a high solvency ratio indicates its financial trustworthiness. It is more capable and hence more likely to fulfill its debt and other commitments.

How is Solvency Ratio Calculated?

The solvency ratio is determined by assessing a company’s solvency margin - a calculation of how a company’s assets compare to its liabilities. In simple terms, the solvency ratio of a company is derived by dividing the company’s operating income (after tax) by the company’s debt liabilities. A simpler way of depicting this calculation is:

Solvency ratio = (Net income + Depreciation) / Liabilities

How Does Solvency Ratio Matter in Life Insurance?

When you buy a life insurance policy, you enter into an agreement with the insurer. As per this agreement, you are expected to pay regular premiums so that in the event of your unfortunate demise, your beneficiaries can file a claim and receive financial coverage from the insurer. However, in order for the insurer to be able to provide this financial coverage, the insurance company must be in a stable financial position.

This is where the solvency ratio comes in. There are a variety of life insurance products in the market, with a variety of different features on offer. But it is the solvency ratio that helps you determine what is truly important - the settling of your insurance claims.

A life insurance provider with a high solvency ratio is more likely to be financially stable and therefore, more equipped to pay out your insurance claims and survive for a long time. Hence, an insurer’s solvency ratio is a direct indication of its ability to pay out claims.

Therefore, by reviewing the solvency ratio of a potential insurer, you can raise the likelihood of your claims being settled even before you purchase the life insurance policy. Moreover, the solvency ratio of an insurance company can be the crucial factor that helps you determine which life insurance plan is a superior option.

How Can You View an Insurer’s Solvency Ratio?

It is the responsibility of the Insurance Regulatory and Development Authority of India (or IRDAI) to ensure that Indian insurers are upheld to certain standards, including a mandated solvency ratio. As a result, life insurance providers in India are expected to maintain a solvency ratio of 1.5 (or a solvency margin of 150%).

However, even within these limits, individual life insurance providers differ in their ranking. To determine the ideal life insurance provider for you, you can browse through the solvency ratios of all registered insurers in the annual report published on the IRDAI website.

Conclusion

In order to maximise the effectiveness of your policy, it is important to ensure that you purchase your life insurance from the right insurer. To that end, a metric like the solvency ratio is a good place to start.

If you are looking for a reliable term plan from a life insurer with a high solvency ratio, consider availing the iSelect Smart360 Term Plan from Canara HSBC Life Insurance. The term life insurance plan comes with features of extensive coverage for your family and the option to avail a variety of add-on covers suited to your needs.