Definitions - solvency margin

[pig]

What is the difference between the solvency margin, surplus and free asset? The definition on the glossary is almost identical, especially between solvency margin and surplus.

 

[Mike Lewry]

Similar terms for A-L

What is the difference between the solvency margin, surplus and free asset? The definition on the glossary is almost identical, especially between solvency margin and surplus.

Good question! These are all very similar concepts and all relate to the difference between asset value and liability value. Any differences relate to what is included within "assets" and "liabilities" and the basis for valuing them.

Solvency margin - usually considered on a supervisory basis. Note the difference between this and required solvency margin, which is the amount of assets that the regulators require an insurer to hold above their supervisory liabilities. So actual solvency margin must be greater than the required solvency margin.

Free assets - again, usually asset and liability values are the values for supervisory purposes and the required solvency margin is often included under liabilities (which would make this different from the total solvency margin).

Surplus - this is used more loosely and could relate to excess assets on either a supervisory or realistic basis.

If the distinction between these terms is important, it should be clear from the context (either in an exam question or your answer to one).

Mike