Solvency ratio and solvency margin

What is the solvency ratio?

The solvency ratio shows how much financial cushion an insurer holds above what it owes policyholders. The available solvency margin (ASM) is the excess of the insurer's assets over its liabilities, valued on regulatory rules. The required solvency margin (RSM) is the minimum cushion the regulator says the insurer must hold for the business it has written. The solvency ratio is ASM divided by RSM.

IRDAI requires every insurer and reinsurer to maintain a solvency ratio above the control level of solvency, currently 150% of RSM, at all times. A ratio of 1.80 (or 180%) means the insurer holds 1.8 times the required margin.

How the solvency ratio works in India

The legal basis is Section 64VA of the Insurance Act, 1938. The method of valuing assets, liabilities and the required margin is set out in the IRDAI (Actuarial, Finance and Investment Functions of Insurers) Regulations, 2024, which replaced the earlier assets, liabilities and solvency margin regulations from 1 April 2024. The appointed actuary certifies the solvency position, and insurers file solvency returns with IRDAI every quarter.

• Available solvency margin: admissible assets (after regulatory haircuts on certain assets) minus mathematical reserves and other liabilities.
• Required solvency margin: for life insurers, a formula based mainly on mathematical reserves and sums at risk, varying by product; for general insurers, the higher of amounts based on net premium and net incurred claims, by line of business. The RSM cannot be lower than a floor linked to the minimum capital required under Section 6 of the Insurance Act.

Worked example (illustrative numbers)

A general insurer has admissible assets of ₹12,000 crore and liabilities (claims reserves, unearned premium, other liabilities) of ₹10,200 crore.

• ASM = 12,000 minus 10,200 = ₹1,800 crore
• RSM (from the regulatory formula) = ₹1,000 crore
• Solvency ratio = 1,800 ÷ 1,000 = 1.80, above the 1.50 control level.

If a large catastrophe added ₹600 crore of claims with no reinsurance recovery, ASM would fall to ₹1,200 crore and the ratio to 1.20, below the control level. The insurer would need fresh capital, more reinsurance or slower growth.

Solvency ratios in India

Insurers disclose the solvency ratio quarterly (for life insurers it is in form L-22). The IRDAI Annual Report 2024-25 reports the position at 31 March 2025:

Company examples: LIC reported 2.11 at 31 March 2025, SBI Life 1.91 at 31 December 2025 and ICICI Lombard 2.69 at 31 March 2025.

Changes ahead

IRDAI is moving toward a risk-based capital regime, under which required capital would depend on each insurer's actual risks rather than a uniform factor-based formula and a single 150% threshold. Insurers ran a second quantitative impact study in 2025, and in December 2025 the Authority approved drafting regulations for stakeholder consultation. Until a new framework takes effect, the existing solvency rules apply. IRDAI's Ind AS consultation paper of March 2026 also states that solvency will continue to be determined under the framework the Authority prescribes, separately from Ind AS accounts.

What the solvency ratio means for distribution

• Growth uses capital. Writing new business, especially in life insurance where new business strain is high, consumes solvency margin. An insurer near the threshold may slow sales, change its product mix or pull back from capital-hungry channels.
• Capital raising follows sales plans. Many private insurers raise equity or subordinated debt to fund growth. Distribution leaders planning a big partner launch should know whether the insurer has the capital headroom to support it.
• Use it in partner and customer discussions with care. A high solvency ratio is one sign of financial strength, but it is a regulatory measure on specific valuation rules. It should be read with claim settlement and complaint data. Three government-owned general insurers reported negative ratios at March 2025 and continue to write business, which shows the ratio is one input among several.
• Expect product changes under RBC. Guaranteed savings products and long-term guarantees may need more capital under a risk-based regime, which could change what channels are asked to sell.