Must Read : What, Why and Different Types of Term Insurance and different types of riders available in Insurance
Let us first understand what is solvency ratio?
“Solvency Ratio” means the ratio of the amount of Available Solvency Margin to the amount of Required Solvency Margin.
“Available Solvency Margin” means the excess of value of assets over the value of liabilities i.e premium written
The solvency ratio is the only one measure, which informs us whether the company will stay solvent or not.
IRDA has prescribed solvency ratio of 1.5 for Insurance companies in India.
Must Read : Why Not To Purchase Term Insurance With A Return Of Premium Option?
Let us simplify solvency ratio with an example
Insurer A has a liability of Rs.1000 and arrives at a solvency margin of say Rs.1100. This means the required assets should be worth Rs.1100. But in order to provide a further cushion to this number, IRDA has prescribed a solvency ratio of 150% i.e 1.5, which means the insurer will need to maintain Rs.1500 instead of just Rs.1100.
Solvency Ratio is available in the annual report published on the IRDA website, click here
|Source IRDA 2014-2015 Annual Report|
LIC is government owned and in case of any downward movement in solvency ratio, Government of India (GOI) can infuse capital. The only worst scenario would be GOI going bankrupt like Greece for which chances are very very slim as Indian economic situation had been good even through the tough times of 2008-2009 recession.
In a Nutshell "Higher the solvency ratio indicates better company profile"
Must Read : Why Term Insurance is required till 60 years
Next is Claim Settlement Ratio
The main purpose of the insurance will be beaten if the policyholder does not get the claim when required.
In that case, the claim settlement ratio is required and it can be explained as the total number of death claims settled by an insurance company.It is calculated by dividing the total number of death claims received by the total number of settled cases by the insurer.
Claim Settlement Ratio=Total Number of Death Claims / Total number of cases settled
Say for example, the Reliance insurance gets the death claims around 1000 and it is capable of settling only 960 claims, then the claim settlement ratio of Reliance will be 96 percent. As the claim settlement ratio gets higher, the company becomes more favorable for the investors.
|Source : www.mintwise.com|
Combination of Solvency Ratio + Claim Settlement Ratio is a must because if you look at solvency ratio of DHFL Pramerica is 12.69 where as CSR is only 57.19% which dissolves the whole purpose of buying an Insurance
Must Read : How Much Insurance Do you Need
Yes it is safe to buy from a private insurance companies provided the policy which you are buying is cost effective.
I personally have bought 2 Term Insurance policy of 75 Lakhs each after comparing their quotation, selecting the cheapest one and after checking their Solvency Ratio and Claim Settlement Ratio
This way i have mitigated the risk of Insurance company going bankrupt (chances are very very less due to stringent guidelines by IRDA) ,if this risk occurs , there would be other company around to settle me. The chances of both of them going bankrupt are almost negligible, what do you say ?
Do let me know your thoughts in comment section....
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