Solvency Ratio

The solvency ratio compares an insurer's excess assets to the amount it owes, so it measures how much financial cushion remains after all liabilities are covered. If assets equal liabilities, the ratio is 0; if assets are larger, the ratio is positive, and a higher value means a stronger buffer against losses or unexpected claims. It works because it uses net assets (A - L), then scales that surplus relative to liabilities so the result is easy to interpret across firms of different sizes.

Use this when assessing an insurer's financial strength, especially in regulatory review, risk management, or comparing balance sheets across companies. It is also useful when estimating how much room a business has to absorb shocks before liabilities start to exceed assets.

• Using assets divided by liabilities instead of surplus over liabilities
• Forgetting to subtract liabilities from assets before dividing
• Leaving the result as a decimal without converting it to a percentage when a percentage is expected