Solvency Ratio
AdvancedA solvency ratio is a measure of an insurer's or company's ability to meet its long-term obligations, comparing its available capital or resources with its liabilities or capital requirements.
For insurers, the solvency ratio usually compares the capital they hold with the minimum capital regulators require. Under the European Union's Solvency II framework, and similar regimes, the key measure divides eligible own funds by the solvency capital requirement.
For example, an insurer with eligible own funds of 150,000,000 and a solvency capital requirement of 100,000,000 has a solvency ratio of 150%. A ratio above 100% means it meets the requirement; insurers typically aim for a comfortable buffer above this level.
The solvency capital requirement is calibrated so that an insurer meeting it should be able to absorb losses from a severe event that would occur, on average, only once in 200 years.
For non-financial companies, solvency ratios are used more loosely to describe measures of long-term financial health, such as comparing cash flow with total liabilities, or debt with equity. Different organisations define solvency ratios differently, so the specific calculation should always be checked.
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