Solvency Ratio in Term Insurance: Ditto 2025

When you’re buying a term insurance policy, you need to think on two fronts—choosing the right insurer and choosing the right policy.

And when it comes to picking an insurer, one of the first things our in-house experts recommend is this: Always check the credibility metrics from the last 3 years.

Now, what exactly are credibility metrics?

They include key indicators like the Claim Settlement Ratio, Amount Settlement Ratio (ASR), complaint volume, and even the insurer’s annual business income. These numbers give you a peek into how reliable and customer-friendly an insurer really is.

But there’s one more crucial number that often flies under the radar—the Solvency Ratio.

This metric shows whether the insurer has the financial muscle to pay out claims, not just today, but 30 or 40 years down the line. Because let’s face it: You’re not buying a term plan for the next 5 years. You’re locking in protection for decades. And that long-term promise only holds weight if the insurer can back it up financially.

Without further ado, let’s jump in:

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Overview

What is the Solvency Ratio in Term Insurance?

The solvency ratio in insurance is a financial metric that reflects an insurer’s ability to meet its long-term liabilities and its ability to pay out claims when required. The solvency ratio is calculated by dividing the available solvency margin by the required solvency margin. 

The solvency ratio insurance formula, therefore, is: 

Solvency Ratio = (Available solvency margin/Required Solvency Margin)

The solvency ratio indicates the financial security of an insurer. It compares the company’s additional assets (called Available Solvency Margin) to the minimum amount they are required to hold (called Required Solvency Margin) as per IRDAI rules. A higher ratio indicates that the insurer has a greater financial cushion and is better equipped to pay future claims.

IRDAI (Insurance Regulatory and Development Authority of India) mandates that every insurer should maintain a minimum solvency ratio of 1.5 (or 150%). This means the insurer must have at least 1.5 times the assets required to cover its liabilities. Now, what are liabilities and assets in the context of insurance?

Assets for an insurer are the resources it owns or controls, such as investments made from premiums collected, capital from investors, and other income-generating assets. These resources help the insurer pay future claims and cover operating expenses.

Liabilities, on the other hand, refer to the insurer’s obligations, primarily the amounts it needs to pay out in claims to policyholders, as well as any payments to shareholders. Essentially, liabilities are the insurer’s debts or financial commitments, while assets are the resources it has to meet those obligations.

Think of the solvency ratio like a cushion in your savings account. If you need ₹1 lakh tomorrow, wouldn’t you feel more secure knowing you have ₹1.5 lakh saved up? That’s what insurers are required to do—keep more than what they might need to pay out.

Don’t confuse solvency with liquidity. Solvency reflects an insurer’s long-term financial strength and is publicly reported. Liquidity, on the other hand, refers to how much cash flow is readily available to settle claims in the short term. But here’s the thing—liquidity is an internal metric, not disclosed publicly, so we can’t evaluate it from the outside. That’s why the solvency ratio becomes more relevant when assessing an insurer’s ability to meet claims over the long run.

Ditto’s Take: While a healthy solvency ratio reflects an insurer’s ability to handle long-term claims, it’s not the most critical metric for choosing a term plan. IRDAI mandates a minimum ratio of 150%, and most insurers comfortably stay above this mark, so it’s rare for solvency to dip dangerously low. Instead, focus more on consistent solvency trends over 3–4 years, rather than a single year’s data. And don’t ignore other crucial indicators like Claim Settlement Ratio (CSR), Amount Settlement Ratio (ASR), and Complaint Volume (CV)—they paint a clearer picture of real-world reliability.

Solvency Ratio Formula Explained

The solvency ratio insurance formula is as follows:

Solvency Ratio = Available Solvency Margin ÷ Required Solvency Margin

The Available Solvency Margin (ASM) is the extra capital an insurer has after covering all its debts. It’s like a safety cushion between what the insurer owns (assets) and what it owes (liabilities), based on IRDAI’s rules.

The Required Solvency Margin (RSM) is the minimum capital an insurer must maintain, and it varies based on the type of insurer (life, health, or general) and the policies it offers. However, in all cases, the RSM must be at least 50% of the minimum capital set under Section 6 of the Insurance Act, 1938.

In life insurance, for example, products like term plans provide only death coverage with no payout if the person survives. Because the insurance company may have to pay a large amount suddenly if many deaths occur, it must set aside more capital for such plans, which increases the RSM. These calculations are done carefully by trained experts known as actuaries, who use data, statistics, and financial modeling to ensure insurers stay financially healthy while protecting policyholders’ interests. In short, the more uncertain or risky the payouts from a product, the more money an insurer must keep aside – and that’s what drives the RSM.

As per regulations, insurers must maintain an ASM that is at least 150% of the RSM. In simple terms, if your RSM is ₹100 crore, your ASM must be at least ₹150 crore. So, your solvency ratio should be 1.5 or higher.

Let’s take a basic example:

If an insurer has assets worth ₹1,200 crore and liabilities worth ₹1,000 crore, the ASM is ₹200 crore.

If the RSM is ₹100 crore, then:

Solvency Ratio = ₹200 crore ÷ ₹100 crore = 2.0 (or 200%)

This means the insurer has twice the capital required to maintain its financial health.

The formula ensures that insurers can meet claim obligations even in uncertain situations. It’s a guardrail that protects policyholders from the risk of insurer default.

Solvency Ratio of Life Insurance Companies in India

The table below illustrates the solvency ratio of life insurance companies in India, which can also be found in the IRDAI Annual Reports:

Importance of Solvency Ratio in Term Insurance

When buying term insurance, you’re betting on an insurer’s ability to deliver—maybe 20, 30, even 40 years down the line. That’s where the solvency ratio comes in.

1. Reflects the financial health of an insurer
   A high solvency ratio shows that the insurer has enough assets to meet long-term obligations. It’s a key sign of financial stability and their ability to pay out future claims.
2. Assurance of timely claim settlements in the long term
   Since term insurance claims often arise decades after buying the policy, a strong solvency ratio ensures the insurer can honour those payouts even many years down the line.
3. Helps in selecting a trustworthy insurer for 20–40 year policy periods
   When committing to a long-term policy, you want an insurer who won’t fold under financial stress. A healthy solvency ratio gives confidence that they’ll be there when your family needs them most.

Think of it as a long-term trust check, because financial strength today is your family’s safety net tomorrow.

IRDAI Guidelines on Solvency Ratio

As stated in IRDAI’s Annual Report for 2023-2024, the IRDAI mandates that all life insurers must maintain a minimum solvency ratio of 1.5, or 150% of the required solvency margin. This ensures insurers hold a strong financial buffer over their liabilities at all times.

The 1.5 threshold is a safeguard. It ensures that even if unexpected losses or high claim volumes occur, the insurer has enough capital to stay solvent and continue servicing policyholders. It’s a way to protect customers from the risk of insurer default.

What Happens if an Insurer has Solvency Issues?

If an insurer’s solvency ratio drops below 1.5, IRDAI can step in with corrective measures. These strict solvency requirements and constant monitoring avoid any major surprises, but when an insurer in India becomes financially insolvent, the Insurance Regulatory and Development Authority of India (IRDAI) initiates a structured resolution process designed to protect policyholder interests and preserve industry stability. 

Through continuous monitoring of solvency margins, IRDAI can impose corrective measures such as capital infusion directives to owners, restrictions on new business, or management oversight. If the situation remains unresolved, IRDAI is empowered under Section 52B of the Insurance Act, 1938, to facilitate the compulsory transfer of business to a solvent insurer. This was demonstrated in the case of Sahara India Life Insurance, where policyholders were seamlessly transferred to SBI Life, ensuring uninterrupted coverage and servicing. 

While IRDAI cannot compel other insurers to inject capital into a failing company, it may invite proposals for mergers, acquisitions, or business takeovers, typically done on commercial terms. Importantly, India does not operate a policyholder guarantee fund, and while complete liquidation of the insurer remains a legal recourse under Section 52H, it is considered a last resort. In practice, IRDAI prefers market-led or regulatory-led resolutions that avoid disruption to policyholders and maintain public trust in the insurance ecosystem.

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Solvency Ratio vs. Other Financial Metrics

To assess an insurer’s credibility, no single number tells the full story. You need to look at a mix of key metrics—each revealing a different layer of the insurer’s performance and reliability:

• Solvency Ratio shows the insurer’s financial strength—whether they have enough assets to meet future liabilities. It’s about the long-term ability to pay claims, especially crucial for term insurance that can last 20–40 years.
• The Claim Settlement Ratio (CSR) reflects how many claims an insurer actually settles compared to the total number received. For example, if the CSR is 98%, that means 98 out of every 100 claims got paid. It’s a quick trust signal—insurers with consistently high CSR are generally more dependable when it’s time to process a claim. But CSR doesn’t reveal how much was paid in those claims.
• Amount Settlement Ratio (ASR) picks up where CSR leaves off. It compares the total amount paid against the total amount claimed. Even if CSR is high, a low ASR might indicate that the insurer often pays out claims of lower value while neglecting to pay high-value claims. It’s a better lens to gauge how fairly they settle. That being said, any ASR above 90% is good.
• Complaint Volume is a direct reflection of customer experience. A lower number of complaints indicates smoother claims handling, better service, and higher satisfaction. It’s a red flag if an insurer has a high complaint count despite strong CSR or ASR numbers. Together, these four metrics give a 360° view:

1. Solvency Ratio → financial strength
2. CSR → reliability in paying claims
3. ASR → fairness in claim amounts paid
4. Complaints Volume → quality of service and customer satisfaction

Ditto’s Take: Don’t rely on just one metric—solvency shows long-term strength, but CSR, ASR, and complaint volume complete the picture. Together, they help you pick an insurer that’s financially solid and treats customers fairly. When evaluating insurers, especially for long-term commitments like term insurance, checking all four can help you choose a provider you can actually count on.

Key Takeaways Before Buying a Term Plan

Before locking in a term plan, it’s worth taking a step back and checking a few key metrics that reveal how dependable your insurer really is.

• Always check the solvency ratio before buying – It reflects the insurer’s financial health and their ability to honour long-term claims, especially critical for term plans that span decades.
• Look for consistency in the ratio across the years – A one-time high solvency ratio isn’t enough. You want an insurer that maintains strong financial reserves year after year.
• Combine it with CSR for balanced decision-making – A solid solvency ratio means the company can pay, and a high Claim Settlement Ratio means they actually do. Together, they offer a more complete picture of the insurer’s reliability.

Because when you’re choosing a policy that could last decades, a little due diligence today can mean peace of mind for a lifetime.

Best Term Insurance Plans 2025

1. HDFC LIFE Click 2 Protect Super:

HDFC Life Click 2 Protect Super is a comprehensive term insurance plan that offers strong customisation options and is backed by a reputable insurer. While it has an impressive claim settlement track record, it can be relatively expensive for some profiles.

• The plan has a high Claim Settlement Ratio of 99.2%, indicating that HDFC Life is highly reliable when it comes to paying claims.
• It maintains a low complaints ratio of just 2 per 10,000 claims, reflecting a good customer experience.
• It offers a range of add-ons, including accidental death benefit, waiver of premium on disability or critical illness, and total permanent disability cover.
• You can also opt for a step-up cover that increases your life cover in line with inflation. And with the life stage benefit, you can increase your cover at major life events like marriage & childbirth.
• One notable in-built feature is the zero-cost option, which allows you to exit the policy within a specified window and get your premiums refunded.
• The critical illness rider covers 60 illnesses and comes with a shorter-than-average 90-day waiting period. However, the critical illness payout comes with a 15-day survival clause and is paid in addition to the base cover, not as an accelerated benefit.
• The terminal illness benefit provides partial payouts on diagnosis.

Overall, this is a dependable and well-designed term plan that offers peace of mind, especially for those who want more flexibility. But if affordability is a key concern, it might not be the most budget-friendly pick.

2. ICICI Prudential iProtect Smart:

ICICI Prudential iProtect Smart is a well-rounded term insurance plan that offers a good mix of affordability and benefits, making it especially attractive for salaried individuals and smokers.

• It comes with competitive premiums and a claim settlement ratio of 97.52%, alongside an amount settlement ratio of 92.1%, which reflects fair payout behavior on claims.
• One of its key features is the Life Stage Benefit, which allows you to increase your cover after life events like marriage or childbirth.
• It also offers a Zero Cost Option that lets you exit the policy within a defined period and receive your premiums back.
• The terminal illness benefit pays out the full sum insured upon diagnosis, providing financial support when it’s needed most.
• You can add accidental death benefit coverage and critical illness cover for 34 listed conditions, with immediate payout on diagnosis.
• However, the critical illness benefit is paid from the base cover (accelerated payout).
• The waiver of premium applies only in case of permanent disability due to an accident, which limits flexibility in some health-related situations.

The plan does not offer inflation-linked top-ups or a separate payout for total permanent disability, but it still delivers strong value for those seeking straightforward protection with a few thoughtful add-ons.

3. Axis Max Life Insurance Smart Term Plan Plus:

The Axis Max Life Smart Term Plan Plus is a flexible term insurance plan that offers seven different coverage options, catering to varied life needs.

Among these, the “Regular (Level Cover)” and “Smart Cover” variants stand out, with the Smart Cover offering 1.5X coverage for the first 15 years—perfect for high-responsibility phases of life.

The Regular option is straightforward and simple, ideal for those looking for a no-frills term plan.

It comes with essential add-ons like accidental death benefit, waiver of premium on disability or critical illness, and a critical illness rider that covers 64 illnesses.

The plan includes a zero-cost exit option, where you can get your premiums refunded if you exit during a pre-defined period.

Women policyholders can benefit from added perks, such as Lifeline Plus, which adds extra value to the offering.

However, the plan doesn’t allow you to increase your cover later or link it to inflation, which limits its adaptability over the long term.

Despite this, it remains a strong and customizable plan that works well for most people looking for flexibility and protection.

4. Bajaj Allianz Life eTouch II: 

Bajaj Allianz Life eTouch II is a well-balanced term insurance plan that offers affordability, strong claims performance, and valuable rider options.

• It includes a Zero Cost Option that allows you to exit the policy during a specific period and get your premiums refunded, adding flexibility.
• The plan offers a waiver of premium benefit for permanent disability due to accidents, and a life-stage benefit that lets you increase your cover after life events like marriage or childbirth.
• Its critical illness rider covers 60 conditions, provides a payout in addition to the base sum insured.
• Women and non-smokers get highly competitive pricing, making it especially attractive for those profiles.
• The insurer has a strong claims track record with a 99.11% claim settlement ratio, a low complaint ratio of 4.4 per 10,000 claims, and a 93% amount settlement ratio—all above industry average.
• However, the plan doesn’t offer inflation-linked cover increases or a lump sum payout for total permanent disability, which might be a drawback for some.

Still, eTouch II remains a compelling choice for buyers looking for a reliable, feature-rich plan at a reasonable price point.

5. TATA AIA Sampoorna Raksha Promise: 

TATA AIA Sampoorna Raksha Promise is a reliable and budget-friendly term insurance plan that offers good coverage, especially for individuals with lower annual incomes.

• It features strong claim performance, with a 98.9% claim settlement ratio, a low complaints ratio of 3 per 10,000 claims, and a 92.7% amount settlement ratio.
• The plan includes valuable add-ons like critical illness cover, which pays a lump sum over and above the base cover if you’re diagnosed with any of the 40 listed illnesses.
• It also offers accidental death and total permanent disability benefits, along with a waiver of premium if you become critically ill or permanently disabled.
• Built-in features like the life stage benefit let you increase your cover after significant life events, and the terminal illness benefit includes a partial payout.
• However, it lacks a zero-cost exit option and doesn’t allow automatic cover increases linked to inflation, which may limit long-term flexibility for some.

Despite these limitations, the plan stands out for its affordability, solid features, and dependable claim support, making it a strong contender in the term insurance space.

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Conclusion

In a nutshell, the solvency ratio is your assurance that the insurer can handle future claims. It’s a key indicator of financial stability, ensuring that your health insurance provider can pay out when you need it the most. Always check an insurer’s solvency ratio before buying a plan — it’s one of the best ways to make sure you’re choosing a reliable, financially secure company. After all, your health and peace of mind deserve nothing less!

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