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The insurance companies being a financial institution prone to various types of risks. They are treated as custodians to the funds of the general public and hence to serve its policyholders properly they have to manage and mitigate various types of risk. These companies are taking risks of the general public in lieu of payment of a small amount of premium. Unless insurance companies manage their risks, they will not be in a position to effectively deliver their values to the customer and stay afloat in the business to achieve their goals.


Let's discuss its definition;

Cambridge Dictionary defines it as; the amount of capital that an insurance company has in relation to probable claims.

  • The solvency margin is a minimum excess on an insurer's assets over its liabilities set by regulators. It can be regarded as similar to capital adequacy requirements for banks. 
  • The solvency ratio of an insurance company is the size of its capital relative to all risks it has taken.
  • Definition of solvency ratio: The solvency ratio is a measure of the risk an insurer faces of claims that it cannot absorb.
  • The solvency ratio of an organization gives an insight into the ability of an organization to meet its financial obligations.
Concept Of Own Risk Solvency Assessment (ORSA)


Solvency margin defined as the difference between assets and the expected value of liabilities would not be a reliable measure of the financial state of an insurance company if either of these or maybe both are not evaluated in a reliable way. The fixing of solvency margins is not an isolated problem, on the contrary, it is only part of the security measures which must all be managed at the same time. The ultimate purpose of the security system prescribed by legislation must be to safeguard policyholders and claimants against losses.

From above we understand that Solvency refers to a company’s ability to meet its long-term obligations through its operations. Generally, it is confused with liquidity, which refers to a firm’s ability to meet its financial obligations with cash and short-term assets it currently holds.

Solvency Margin is an important financial indicator. It measures an insurance company’s ability to pay out claims when unforeseen events occur.



Denotes the methods and processes used by an organization to manage risks and seize opportunities related to the achievement of their objectives. ERM provides a framework for risk management, which typically involves identifying particular events or circumstances relevant to the organization’s objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring progress.

A business organization by identifying and proactively addressing risks and opportunities create value for their stakeholders, including owners, employees, customers regulators, and society overall.



is one of the methods to assess risks and manage it appropriately. As we know that Solvency Margin is a measure of the stability of an insurer. The Regulator, IRDAI has fixed Solvency Margin for each type of Insurance Companies.

Every insurer should under its Own Risk and Solvency Assessment (ORSA) and document the rationale, calculations, and action plans arising from this assessment.

The ability of an insurer to reflect risks in a robust manner in its own assessment of risk and solvency is supported by an effective overall ERM (Enterprise Risk Management) and by embedding its risk management policy in its operations. It is recognized that the nature of the assessment undertaken by a particular insurer should be appropriate to the nature, scale, and complexity of its risks.

The prime purpose of ORSA is to assess whether its risk management and solvency position is currently and likely to remain so in the future.

The responsibility for the ORSA rests at the top level of the insurer’s organization, the insurer’s Board, and the senior management. The effectiveness of ORSA should be reviewed by the Chief Risk Officer of the insurer, who is directly reporting to the Senior Management or Board.

The Solvency II Directive; is a new regulatory framework for the insurance industry that adopts a more dynamic-based approach to assess risks. The main pillars are as follows;


Pillar I: covers all quantitative requirements. This pillar aims to ensure firms are adequately capitalized with risk-based capital. All valuation in this pillar is to be done in a prudent and market-consistent manner.

Pillar II: imposes higher standards of risk management and governance within a firm’s organization. This pillar also gives supervisors greater power to challenge their firms on risk management issues. It includes the Own Risk and Solvency Assessment (ORSA), which requires a firm to undertake its own forward-looking, self-assessment of its risks, corresponding capital requirements, and adequacy of the firm’s organization.

Pillar III: aims for greater levels of transparency for supervisors and the public.

ORSA is an important component of the Enterprise Risk Management framework, which is a confidential internal assessment appropriate to the nature, scale, and complexity of an insurer conducted by that insurer of the material and relevant risks identified by its management.


  1. The ORSA requires insurance undertaking to determine their overall solvency needs, beyond the Capital Adequacy requirements defined in Pillar I.
  2. The ORSA process should take into account the effects of all the material risks such as underwriting, ORSA, and strategic risks.
  3. It should also consider planned management activity and external factors such as economic outlook.
  4. It should include a 3-5 years’ time horizon for the firm’s activities and risk outlook.


Has two primary goals

  1. To foster an effective level ERM at all insurers, through which each insurer identifies, assesses, monitors, prioritizes, and reports on its material and relevant risks identified by the insurer, using techniques that are appropriate to the nature, scale and complexity of the insurer’s risks, in a manner that is adequate to support risk and capital decisions; and
  2. To provide a group-level perspective on risk and capital, as a supplement to the existing legal entity view.


An insurer that is subject to the ORSA requirements will be expected to;

  1. Regularly, no less than annually, conduct an ORSA to assess the adequacy of its Risk Management Framework and current and estimated projected future Solvency Position;
  2. Internally document the process and results of the assessment.

The insurer should perform its own assessment of the quality and adequacy of capital resources both in the context of determining its economic capital and in demonstrating that regulatory capital requirements are met having regard to the quality criteria established by the supervisor and other factors which the insure consider relevant.


An insurance company being custodian to the money of policyholders is prone to various types of risks. They have to manage their risks so that they shall effectively deliver their values to the customers/policyholders. they have to develop a well establish Enterprise Risk Management System, which involves various methods and processes to manage risks and seize opportunities to achieve their objectives. An insurance company has to create value for its stakeholders, including owners, employees, customers, regulators, and society, and for this, they have to afloat and maintain its sustainability by an effective Risk Management System.

Disclaimer:  The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Some judgments of counts have been taken as it is available. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, the author assumes no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take the appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. The author assumes no responsibility for the consequences of the use of such information.


Published by

FCS Deepak Pratap Singh
(Manager Compliance -SBI General Insurance Co. Ltd.)
Category Corporate Law   Report

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