In life and in business having to face risks is inevitable. A risk can be defined as the probability of an occurrence that results in a loss. In business, it is expected to use prudence in managing various risks the business may face, recognizing the Probability and the Severity of such risks

In managing risks, managers have the following option:
• Accept the risk yet continue operations without doing anything about it
• Take steps to eliminate the threat
• Reduce the probability of its occurrence
• Take steps to reduce the severity if it occurs
• Transfer the risk or the consequences of the risk to another party

Insurance is the most popular mechanism of risk transfer. In choosing insurance companies, corporate entities are required to check the capabilities of Insurers to honour valid claims. The primary basis by which this can be checked is the solvency margin an insurer maintains. This should be compared to the practice of insisting on:
• Bank guarantees when selling goods on credit
• Performance bonds when granting contracts
• Guarantors when selling goods on hire-purchase or on leasing
• Checking on titles before purchasing land
• Registration book when purchasing motor vehicles
• Warranties and guarantees when buying machines and equipment

From this perspective, the solvency margin of the Insurer is equally, if not even more important, than the mechanism by which one transfers a financial risk that is too much to bear. The solvency margin is an indicator of having a buffer to ensure that the obligations under the insurance contracts can be met at anytime.

Solvency margin can be defined as the difference between the value of the admissible assets and the value of the liabilities required to be maintained by an insurer. With regards to Non – Life (General) insurance the minimum solvency margin shall not be less than highest of the following :
• Rs.50 Million
• Sum equivalent to 20% of net written premium
• Sum equivalent to 40% of the average net outstanding claims for the three years immediately preceding the current year.

On the face of it, the solvency margin can be seen as the difference between assets and liability. The admissibility of assets as defined by the regulator makes it important to focus attention to this categorisation.

Regulators all over the world define asset categories as admissible mainly by considering the ability to convert such assets to cash, to make insurance claims, and they keep a close tab on such asset maintenance by Insurers to ensure the proper security to 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.

Solvency margins and the definitions of admissible assets 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. (No. 1341/8 Monday, May 17, 2004 Regulation Of Insurance Industry Act, No, 43 of 2000)

IBSL proposed this year that all Insurers declare their solvency positions effective 2005, and issue self-compliance declaration 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 not only ask for proof of solvency, they must keep requesting the half yearly certificates as an ongoing assurance of the Insurer’s capability. 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 liabilities.