Solvency Ratio

Solvency ratio of a life insurance company can be defined as ratio of how much capital an insurer has compared to the risk it has taken. This ratio indicates the company’s capital adequacy or its ability to pay off claims, as and when they arise.

In case, an insurer has a high solvency ratio, it is in a better position to pay out any claims that might arise in the future as compared to an insurer with a low solvency ratio. Insurance companies in India are required to maintain a minimum solvency ratio as prescribed by Insurance Regulatory and Development Authority of India (IRDAI). Let’s take a closer look at the minimum solvency ratio requirements for Insurers in India. 

As per the Insurance Regulatory and Development Authority of India or the IRDAI, a minimum of 1.5 solvency ratio (150%) is mandatory to be maintained by life insurance companies at all times. The reason for this 150% of margin is to lower the risk of default and safeguard the policyholder from unsettled claims due to availability of inadequate funds with the insurer. Solvency ratio of life insurance companies is published as part of their quarterly financial report.

As per the Insurance Regulatory and Development Authority of India or the IRDAI, a minimum of 1.5 solvency ratio (150%) is mandatory to be maintained by life insurance companies at all times. The reason for this 150% of margin is to lower the risk of default and safeguard the policyholder from unsettled claims due to availability of inadea

As per the IRDAI definition, solvency ratio is “the ratio of the amount of Available Solvency Margin (ASM) to the amount of Required Solvency Margin.” ASM is the excess of assets over liabilities and solvency ratio shows how big this excess margin is. So, to calculate the solvency ratio of a company, you can use the below formula:

Solvency Ratio = (ASM)/(RSM)

Where,

ASM = Excess of Assets over Liabilities and

RSM = Capital Requirement as stipulated by Regulations

quate funds with the insurer. Solvency ratio of life insurance companies is published as part of their quarterly financial report.

Solvency ratio, as discussed before, gives an insight into an insurance company’s ability to handle claims received by it. After all, after purchasing life insurance and paying all due premiums you would definitely not want the insurance company to be unable to settle a valid claim just because the company does not have enough money to pay the claim amount. This is why one should consider the solvency ratio of a life insurance company before buying a life insurance policy.

The solvency ratio of an insurance company can easily be found in the public disclosures section of the official website of the insurer as well as in the IRDAI annual report that can be downloaded from the IRDAI website.

The solvency ratio of Axis Max Life Insurance recorded in Q1 FY 2024-25 is 203%, significantly higher than the mandatory 150% specified by IRDAI. This is also higher than Axis Max Life Insurance solvency ratio of 172% recorded in Q4 FY 2023-24, which was 1.15 times higher than the mandatory 150% specified by IRDAI. These numbers indicate the company’s strong and stable financial position. So you can be assured that chances of your claim being unpaid due to lack of funds is significantly low if you have purchased a policy from Axis Max Life Insurance Public Disclosures section on the official website.

So, to ensure that you and your loved ones are adequately protected, the role played by your insurer’s capital adequacy to settle your claims when needed cannot be overstated and solvency ratio is a simple way to do this. You should consider this along when other factors include paying premiums on time, choosing add-on benefits and riders, if required, along with adequate cover, before you purchase a life insurance policy.

Thus, when selecting your insurance company, check its solvency ratio, claim settlement ratio and assets under management etc. beforehand. Make sure that the solvency ratio is not too close to the mandatory 1.5 as this could be prove to be a factor of concern in future. A good ratio, like that of Axis Max Life Insurance solvency ratio of 203% should definitely influence your choice when choosing a suitable life insurance provider to protect the interest of your loved ones.