When buying a health insurance plan, studying and comparing different plans is not enough. You also need to understand the financial stability of the health insurance provider you are choosing, along with the health insurance tax benefits.
Although reading testimonials and reviews or understanding the claim settlement ratio is a great way to make an informed decision, diving deeper to learn about the provider’s solvency ratios provides valuable insights.
Therefore, let us understand the health insurance policy company’s solvency ratio and everything you need to know about it. So, before you choose an individual family floater or senior citizen health insurance plan, read this article for better insights.
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Why Health Insurance Solvency Ratio Important?
Solvency in health insurance refers to the financial stability and ability of an insurance company to meet its financial obligations, including paying claims and other liabilities, over the long term. For instance, consider that the insurance company from whom you got your health insurance policy online is not able to pay out claims due to a lack of financial resources. Wouldn’t that be devastating? After so many years of timely payment of your premium, you don’t get the well-deserved protection.
However, understanding your insurance provider’s solvency status before purchasing a health policy will assure you that your financial interests are well-protected.
Understanding of Solvency Ratio For Your Health Insurance Plan
The solvency ratio is a numerical metric of the financial strength of your insurance provider. This metric assures that even if your insurance provider can cover its liabilities, it means an obligation towards you, even in adverse economic conditions or during periods of high claim.
Understanding this ratio will give you a better picture of your insurance company’s financial health. The ratio considers assets, liabilities, and cash flows while calculating.
A high solvency ratio represents your company’s stability, dependability, and long-term financial security. It means the insurer’s capability of fulfilling its obligations. That reduces the chances of claim rejection or losing money.
IRDA on Solvency Ratio
According to IRDA, every insurance provider is mandated to reserve a surplus of assets over liabilities. Furthermore, the Insurance Act of 1938, which is periodically amended, defines a solvency margin threshold.
Every insurance company operating in India must adhere to a specified solvency ratio, as mandated by IRDAI at 150%.
Types of Solvency Ratios
You need to consider multiple metrics when evaluating the solvency of your insurance provider. Relying on multiple metrics gives a deeper and more comprehensive understanding of financial stability and the ability to meet obligations.
| Debt-to-Assets Ratio | Interest Coverage Ratio
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Equity Ratio | Debt-to-Equity Ratio
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| What is it? | The debt-to-asset ratio represents the reliability of your insurance provider on borrowed funds to finance its operation. | The Interest Coverage Ratio shows whether your insurance provider can quickly pay its interest on debt. | These metrics represent the proportion of its assets financed by shareholders’ equity. | This ratio provides a deep understanding of the extent to which a company is financed by debt compared to shareholders’ equity. |
| What does it signify? | The higher this ratio means the company is primarily funded by debts, indicating risk and vice versa. | If the ratio is high, it means the company earns enough to comfortably cover its interest payments. But if it is low, it might indicate a struggle to pay off its interest. | An equity ratio on the higher side suggests that shareholders fund a large portion of a company’s assets. Therefore, the use of debt is less, indicating a healthy financial position and lower financial risk. | A higher debt-to-equity ratio shows that the company relies more heavily on debt financing, which can increase the financial risk and vice versa. |
| Formula | Debt-to-Assets ratio = Debt / Assets
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Interest Coverage metrics = Earning before Interest and Taxes / Interest Expenses. | Equity Ratio = Total Shareholder Equity / Total Assets
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Debt-to-Equity ratio = Total Outstanding Debt / Total Equity
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Conclusion
The solvency ratio is a key indicator to understanding your insurance provider’s financial stability and ability to fulfil financial obligations. Therefore, anyone who is planning to buy a health insurance policy must go through this ratio at least once.
This will ensure that your health insurance provider is sufficiently equipped to honour your claims. IRDA mandates every insurance provider to share details of the solvency of all registered insurers in their annual report. So, ensure you make a well-informed decision before buying your health insurance online or offline.