Solvency

What Does Solvency Mean?

Solvency refers to a business entity’s ability to fulfill its long-term financial obligations. An entity is considered solvent when its assets exceed its liabilities.

Insuranceopedia Explains Solvency

Solvency indicates that a company is not only profitable but also capable of paying its debts and meeting future obligations. It is measured using a ratio that takes into account the company’s income, assets, operational expenses, debts, and interest on those debts.

Solvency is an important factor for potential investors, who typically review a company’s financial statements to assess its ability to remain solvent.

For insurance buyers, an insurer’s solvency matters because claims may not be filed until years or decades after a policy is purchased. Rating agencies like A.M. Best grade insurers on financial strength, and those grades are one of the factors behind rankings of the best life insurance companies and best homeowners insurance companies.