You have done a great job in just deciding to insure your home, vehicle and your life. It shows how responsible you are and we are sure you have done enough research before choosing the right insurance. Wait, did you consider the solvency ratio insurance companies? If yes, great. If not, this article is for you.
Insurance is not just another investment or a security procedure or a wise way to spend your money or anything of that sort. An insurance comes to your rescue when you most need it. And, that is why it is even more important to be aware of the solvency ratio of your insurer.
The measure of the risk an insurer faces with claims that it cannot absorb is called the solvency ratio.
The amount of ASM and RSM is used to calculate the solvency ratio of an insurer. ASM stands for Available Solvency Margin and stands for the company’s assets over liabilities.
RSM means Required Solvency Margin and is based on the net premiums.
To explain it even more simply, it is the ability of the insurance company to settle the claims they receive. It is actually a risk to any insurance company if they receive large number of claims which are beyond their capacity. So, the problem arises when the liabilities exceed the assets.
The need to maintain the Solvency Ratio by Insurance Companies
- IRDAI stipulates that insurers should maintain a minimum solvency ratio of 150%.
- The chances of you getting your claim paid is higher, if the solvency ratio is higher. However, this is not a thumb rule and there are other factors too that you need to look for before choosing an insurer.
- There have been scenarios where an insurer had a high solvency ratio but went through a financial crisis.
- The solvency ratio keeps changing quarterly so it is better to see the ratio for a longer period .
- The solvency ratio will enable you to make a judgement on the company’s ability to meet its debt obligations and other financial commitments.
- It is an opportunity to get an insight into the company’s cash flow and analyze if the company is capable of meeting the liabilities, both long term and short term.
Thus, the solvency ratio is an important aspect to take into account while you choose your insurer but this should not be considered as the only point.
Yes, choosing the right insurer is a crucial step in protecting you and your family. Once you make the right decision, the next important decision is to E-Insure all your policies.
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