In InsuranceSamadhan.com’s A-Z Blog series on Insurance topics, we try to provide all vital information related to the Insurance sector and demystify certain myths related to the sector. In today’s blog, we are sharing detailed information regarding – Solvency Ratio – and everything that one needs to know.
We had been writing blogs on steps taken by IRDA to protect interest of Policy Holders. Besides all measures mentioned. IRDA also keeps any eye on Insurer by regular inspection of company solvency i.e their ability to pay claims or meet liabilities.
What is Solvency Ratio?
In simple terms, solvency indicates the ratio between company assets and liabilities. At any given time assets held by insurer should be 1.5 times of liabilities. IRDA takes a report on quarterly basis and check the ratio. In case the ratio goes below 1.5, then IRDA reviews the situation with Insurer and corrective action is taken. It works in the same way as RBI manages all regulated banks who has to maintain solvency by maintaining SLR and CRR.
Types of Solvency Ratios:
There are 3 types of solvency ratios as mentioned below:
- Debt-to-equity ratios
- Total-debt-to-total-asset ratios
- Interest-coverage ratios
All insurers in Life. Health and General Insurance maintain solvency margin and submit a quarterly report to IRDA.
Solvency margin is a key indicator and is impacted by the following:
- Commercial papers safety though IRDA strictly regulates that investments should be done only in Debt securities.
- Unexpected claim like in case of natural calamity or current pandemic. IRDA becomes extra vigilant and checks solvency.
- Reinsurance contracts: IRDA also check the reinsurance contract so that claim liability ae ascertained.
- Book of risks: Total risk taken by insurer
In case of any variations. IRDA play an advisory role to ensure solvency is restored. So policy holders can be assured that all Insurers are maintaining their solvency as per desired standards. In last 5 years. There had been two instances where IRDA had to take action due to Solvency ratio.
Sahara life had crisis and could not maintain Solvency ratio. they were stopped to do any new business for over 12 months and later company was taken over by ICICI Pru. There had also been example of Reliance Health who was barred to take new business
In case of any observed discrepancy. IRDA first give a warning notice to the insurer under section 52 B. IRDA give a chance to the Insurer for recovery of solvency ratio else IRDA takes corrective action.
So all these processes ensures that public money is well protected.
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