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KPI of the Day – Insurance: % Insurance solvency ratio

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solvency

Definition

Measures the percentage of admitted assets within the insurance organization, from the overall liabilities.

Purpose

To indicate how strong the insurance program is, in terms of covering liabilities from assets.

Recommendations

The solvency ratio is a measure of the risk an insurer faces of claims that it cannot absorb. Liabilities include claims reserves, incurred expenses and accumulated savings with accrued interest. It excludes capital and member equity. The insurer needs to calculate reserves, in order for the true liabilities to be known.

In the insurance industry, the % Solvency ratio is an expression of efficient capital management. The indicator reflects the ability of an insurance company to meet its obligations to beneficiaries and policy holders. By indicating whether an insurance company’s cash flow is sufficient enough to cover its long-term liabilities, the % Solvency ratio is also an important measure of risk control and risk mitigation in the insurance industry.

An insurance company generally has to maintain its % Solvency ratio at 100% throughout time. Any insurance company experiencing a % Solvency ratio below 100% should devise a contingency plan against potential losses. All things considered, a % Solvency ratio of 150% secures the ability of the insurance provider to maintain itself afloat in the case of an adverse event.

Reinsurance, in this case, can be used as a buffer against risk. Reinsurance leads to a significant increase in capital, which ultimately results in a higher % Solvency ratio for the insurance company.

In order to monitor this KPI, data needs to be collected from financial reports. The insurance regulator should normally provide a list of admitted assets (e.g. government securities, high grade bonds and mortgages, cash and cash equivalents, accrued interest of higher-grade investments, etc.).

Targets for % Insurance solvency ratio may vary according to the strategy of covering liabilities, the assets management and insurance programs. This KPI relates admitted assets and liabilities, and in order for the insurance program or institution to be technically solvent, the value of this KPI needs to be higher than 100%.

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