Guidelines in Building up Solvency Margin


In order to satisfy the requirements of solvency margin, the insurance companies have follow the guidelines as stated below:

1. Building up Reserves 

The insurance companies have to build up reserves systematically by holding back a part of the surplus, and transferring it to a special reserve called Solvency Margin Reserve. Holding back too much surplus will result in excessive reduction in bonus rates declared, and make life insurance less attractive, in comparison with other financial instruments. Hence, only a part of the surplus held back shall be utilized for meeting the requirements of solvency margin.

2. Reserves from the difference in the value of assets 

The balance requirement has to be met by the difference between the market value and book value of assets, the share capital and free reserves in the shareholders' fund

3. Share capital 

During the early years of a life insurance company, the share capital will be the major factor in the determination of solvency margin. Gradually the importance of share capital will decline and the solvency margin reserve will become a more dominating factor. As the company grows in size, the solvency margin required will become hundreds of times the size of share capital, and the solvency margin reserve will be the main source for determination of solvency margin

4. Minimum Solvency Margin

The IRDA regulations stipulate that an insurance company should maintain the minimum solvency margin at all times and for each of the lines of business.

5. Separate Solvency Margin for Life and General Insurance

Separate solvency margin will be required for long ternm and general insurance business of a composite company. For life insurance business, the minimum solvency will normally be related to the policy reserve as disclosed by the actuarial valuation of the liabilities. For general insurance business, it is related to higher percentage of net premium or net claim.

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