What is the Solvency Ratio in Health Insurance?

Solvency ratio is the very important component for the financial analyst and the customers to determine if the insurance company is doing financially good or not. Solvency ratios are known as the leverage ratios. It is believed that the insurance companies which have good solvency ratios are considered good financially.

Irdai have set guidelines to all insurance companies to set a minimum solvency ratio of 1.5.

How to Calculate Solvency Ratio?

Solvency Ratio Formula
Solvency Ratio=(Net Income + Depreciation) / (Short-Term Liabilities + Long-Term Liabilities)

Types of Solvency Ratio In Health Insurance

There are four different types of solvency ratios

• Debt to Equity ratio.
• Debt ratio.
• Proprietary Ratio or Equity Ratio
• Interest Coverage Ratio

How Solvency Ratio Matter Before Purchasing Any Insurance

• The solvency ratio is an important factor to know about the insurance company before purchasing any insurance coverage.
• It helps to understand the financial health and stability of insurance providers.
• A high solvency ratio indicates that the insurance company has a solid financial position and can meet its long-term obligations, including claim payouts.
• Purchasing insurance often involves a long-term commitment, such as life insurance or annuities.
• Knowing that your insurance provider is financially stable and has a high solvency ratio can provide peace of mind.

What is a Good Solvency Ratio?

• A good solvency ratio means that it carries as many minimum values as the IRDAI set benchmark.
• Solvency ratio above the parameter of 1.5 set by irdai is considered to be a good solvency ratio. It determines the insurance company has a healthy holding of assets over liabilities in case to cover the loss of company.
• A Good solvency ratio indicates that the company has a good corpus of assets over liabilities that helps in any obligations, or any types of financial loss to the company.
• The insurer with a good solvency ratio also attracts the ace investors, to invest in them as they also know the good solvency ratio indicates the trust of customers.

Top companies for 1 Crore Health Insurance having good Solvency ratio

IRDAI Guidelines For Solvency Ratio

• IRDAI set a benchmark for all insurers to maintain a minimum excess assets over liabilities.
• The solvency margin is the extra capital the companies must hold over and above the claim amounts they are likely to incur. It is a financial backup in extreme situations, enabling the company to settle all claims.
• IRDAI mandates a minimum solvency margin of 150%.
• The minimum solvency ratio insurance companies must maintain is 1.5 to lower risks.

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