Solvency II: How do you calculate surplus capital?

Longer-term solvency is evaluated using the solvency ratio, which divides your organization net worth by its total assets, solvency ratios, also called leverage ratios, measure your organization ability to sustain operations indefinitely by comparing debt levels with equity, assets, and earnings, besides, management must maintain sound policies and procedures to effectively measure, monitor, and control liquidity risks.

Financial Solvency

Your business needs to remain solvent because delays in paying liabilities on time can cause you havery serious problems, there may be some leniency in capital policy, and an adjusted solvency position based on long-term investment conditions is unlikely to be acceptable to regulators if limits are breached. Above all, any increase of the equity capital may oblige your organization to re-calculate at least the obligatory solvency capital due to the existence of new financial resources.

Included Risk

Because you are projecting the same model, the same allowances are made for management actions and policyholder behaviour, the evaluation of cost of capital increases the profitability and solvency of your organization as it helps in analyzing cost efficient financing mix. Not to mention, aspects of portfolio risk, risk management, capital adequacy, regulatory compliance and operational risk and asset liability management are also included in many collateral management situations.

Short-term solvency is often measured by the current ratio, which is calculated by dividing current assets by current liabilities, resulting rating transition matrices are tailored to reflect your portfolios credit risk, based on specific model inputs. As a matter of fact, note that akin risk categories are typically broken down into more categories e.g.

Fixed Insurance

All insurance organizations are required to comply with solvency margin requirements of the regulator as prescribed from time to time, liquidity ratios measure the business organizations ability to meet current obligations. Also, key solvency ratios are debt to equity ratio, debt to capital ratio, debt to assets ratio, times interest earned ratio, fixed charge coverage ratio, etc.

Prudential Program

For a gross line program where the full limits are reinsured, that means more credit risk, the costs of which are passed on to the captive through higher fronting fees, minimum statutory solvency capital, the capital requirement derived from the internal risk capital model and additional capital to reflect market standards. Of course, it will lead to a fundamental change in the way that insurance organizations are required to calculate prudential capital.

Want to check how your Solvency II Processes are performing? You don’t know what you don’t know. Find out with our Solvency II Self Assessment Toolkit: