| An insurance company should have adequate financial resources so as to meet it’s obligations to policy holders and other parties. Solvency margin refers to the excess amount of assets an in insurance company maintains over its liabilities. It works like the capital adequacy ratio of a bank. The Insurance Board of Sri Lanka requires all insurance companies to maintain a particular level of solvency margin for their smooth functioning. |
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Risk is an inevitable element in the life of any person. A risk can be defined as the probability of an occurrence that could result in a loss. A popular mechanism of transferring risk is by way of obtaining an insurance policy against the probable losses.
In choosing an insurance company from which the insurance cover is to be obtained, the capability of insurers to honor claims should be ensured. The primary basis by which this can be checked is by looking at the solvency margin of the insurer. |
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| In this perspective the solvency margin of an insurer is a key indicator of an insurance company, which shows the ability of an insurance company to meet the obligations arising from the insurance contracts at any time. |
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| Solvency Margin – General Insurance |
| Solvency margin can be defined as the difference between admissible assets and liabilities required to be maintained by an insurer who carries on General insurance business. With regard to General insurance business the minimum solvency margin to be maintained by an insurer shall be not less than the highest of the following factors: |
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Rs. 50 million; or |
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A sum equivalent to 20% of the net premium; or |
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A sum equivalent to 40% of the net average outstanding claims for the three years immediately preceding the current year. |
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| Solvency margins and the definitions of admissible assets for General insurance were gazetted by the Insurance Board of Sri Lanka (IBSL) in 2004. The Gazette articulates very clearly the definition with regard to the solvency margin and the assets that can be considered as admissible. (Gazette No. 1341/8 - Monday, May 17, 2004 Regulation of Insurance Industry Act, No.43 of 2000). |
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| Solvency Margin – Long term insurance |
| Solvency margin is defined as the difference between the admissible assets and liabilities required to be maintained by an insurer who carries on Life insurance business. Currently the regulatory requirement is that the Solvency margin shall be not less than 5% of the liabilities of the life insurance company. |
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| The solvency margin and admissible asset rules for Life insurance were gazetted by the Insurance Board of Sri Lanka (IBSL) in 2002. (Gazette No. 1255/12 - Tuesday, September 24, 2002 Regulation of Insurance Industry Act, No.43 of 2000). |
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| On the face of it, the solvency margin can be seen as the difference between assets and liabilities. But what are considered for solvency margin computation are only the admissible assets. and not all assets in the balance sheet of the Company. The admissibility of assets is clearly defined by the regulator. Regulators all over the world define asset categories as admissible mainly by considering the ability to convert such assets into cash to settle liabilities, and they also keep a close tab on such asset maintenance by insurers to ensure the proper security to the policyholders. A simple search on the Internet will show a very large number of articles and reports on the issue and how more and more stringent requirements are being placed on insurers and re- insurers on the solvency margin in the interest of the insuring public. |
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| IBSL has made it mandatory that all insurers declare their solvency positions effective 2005 and issue self-compliance declarations signed by the CEO and the CFO, in the interim period. This amply demonstrates the importance the decision makers should pay to solvency margins of insurers with whom they conduct business. Decision makers should always look for proof of solvency. |
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| In order to have a higher solvency margin, an insurer can re-insure greater parts of the risks they underwrite or estimate the liabilities in a less conservative manner. In order to ensure proper estimating of liabilities, insurers should obtain the services of actuaries who consider the experience of past claims and calculate the prudent levels of future claims. |
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| Read more
on Eagle's Solvency Margins |
