Solvency Ratio in Health Insurance

  • What is the solvency ratio?
  • How to calculate the Solvency ratio?
  • IRDAI Guidelines for Solvency ratio?
Role of the Solvency ratio in insurance?
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What is the Solvency Ratio in Health Insurance?

Solvency ratio is the very important component for the financial analyst and the customers to determine if the insurance company is doing financially good or not. Solvency ratios are known as the leverage ratios. It is believed that the insurance companies which have good solvency ratios are considered good financially.

Irdai have set guidelines to all insurance companies to set a minimum solvency ratio of 1.5.

How to Calculate Solvency Ratio?

Solvency Ratio Formula
Solvency Ratio=(Net Income + Depreciation) / (Short-Term Liabilities + Long-Term Liabilities)

Types of Solvency Ratio In Health Insurance

There are four different types of solvency ratios

  • Debt to Equity ratio.
  • Debt ratio.
  • Proprietary Ratio or Equity Ratio
  • Interest Coverage Ratio
  • Debt to Equity Ratio

    This parameter determines the company have how much debts in campares with equity. This helps in case of any financial loss to company. So the company coud pay back the customers money.
    Debt- toEquity=Total Debt / Shareholders Equity
  • Debt ratio

    This ratio, also known as the Debt-to-Assets Ratio, measures the percentage of a company's debt-financed assets. It indicates the company's risk level regarding its reliance on borrowed funds.
    Debt Ratio=Total Debt / Total Assets
  • Proprietary Ratio or Equity Ratio

    Proprietary ratios are also known as equity ratios. It shows the relationship between the proprietor's funds and the net assets or capital.
    Equity Ratio=Shareholder's funds / Capital or Shareholder's funds / Total Assets
  • Interest Coverage Ratio

    The Interest coverage ratio determines whether the company can pay interest on the outstanding debt obligations.
    Interest coverage ratio=EBIT / interest on long-term debt

How Solvency Ratio Matter Before Purchasing Any Insurance

  • The solvency ratio is an important factor to know about the insurance company before purchasing any insurance coverage.
  • It helps to understand the financial health and stability of insurance providers.
  • A high solvency ratio indicates that the insurance company has a solid financial position and can meet its long-term obligations, including claim payouts.
  • Purchasing insurance often involves a long-term commitment, such as life insurance or annuities.
  • Knowing that your insurance provider is financially stable and has a high solvency ratio can provide peace of mind.

What is a Good Solvency Ratio?

  • A good solvency ratio means that it carries as many minimum values as the IRDAI set benchmark.
  • Solvency ratio above the parameter of 1.5 set by irdai is considered to be a good solvency ratio. It determines the insurance company has a healthy holding of assets over liabilities in case to cover the loss of company.
  • A Good solvency ratio indicates that the company has a good corpus of assets over liabilities that helps in any obligations, or any types of financial loss to the company.
  • The insurer with a good solvency ratio also attracts the ace investors, to invest in them as they also know the good solvency ratio indicates the trust of customers.

Top companies for 1 Crore Health Insurance having good Solvency ratio



Solvency Ratio as of 2022.

HDFC Ergo Health InsuranceHealth insurance1.68
Niva bupa health InsuranceHealth insurance1.7
Care health insuranceHealth insurance1.81
Aditya birla health InsuranceHealth insurance1.73
Star health InsuranceHealth insurance1.7

IRDAI Guidelines For Solvency Ratio

  • IRDAI set a benchmark for all insurers to maintain a minimum excess assets over liabilities.
  • The solvency margin is the extra capital the companies must hold over and above the claim amounts they are likely to incur. It is a financial backup in extreme situations, enabling the company to settle all claims.
  • IRDAI mandates a minimum solvency margin of 150%.
  • The minimum solvency ratio insurance companies must maintain is 1.5 to lower risks.

Role of the Solvency ratio in insurance?: FAQ's

1. What is the Solvency ratio?

The Solvency ratio is the overall measure of Solvency as it calculates the company's actual cash flow apart from income.

2. When does a company release its Latest Solvency ratios Reports?

  • Quarterly financial statements
  • Annual reports
  • Regulatory Filing
  • Investor presentation.

3. How many types of solvency ratios?

There are four different types of solvency ratios

  • Debt to Equity ratio.
  • Debt ratio.
  • Proprietary Ratio or Equity Ratio
  • Interest Coverage Ratio.

4. What is the Benchmark set by IRDAI for the Solvency ratio to insurance companies?

  • The solvency ratio should be above 1.50.
  • The solvency margin should be 150%.

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Simran Kaur Vij

Written By: Simran Kaur Vij

Simran is an insurance expert with more than 3 years of experience in the industry. She may have all the answers to your insurance queries. With a background in Banking, she proactively helps her readers to stay on par with all the latest Insurance industry developments.