Solvency in Auto Insurance

Solvency in auto insurance means that the insurance company has sufficient funds to meet its policyholders' obligations. The best way for an auto insurance company to remain solvent is to properly manage the risk that it underwrites so that it is always able to make payments to policyholders. External auditors and state-owned regulatory bodies are responsible for ensuring an auto insurance provider's solvency.

Free Auto Insurance Comparison

 Secured with SHA-256 Encryption

Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

Full Bio →

Written by

Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

Full Bio →

Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Apr 6, 2021

Advertiser Disclosure

It’s all about you. We want to help you make the right coverage choices.

Advertiser Disclosure: We strive to help you make confident auto insurance decisions. Comparison shopping should be easy. We are not affiliated with any one auto insurance provider and cannot guarantee quotes from any single provider.

Our insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.

Editorial Guidelines: We are a free online resource for anyone interested in learning more about auto insurance. Our goal is to be an objective, third-party resource for everything auto insurance related. We update our site regularly, and all content is reviewed by auto insurance experts.

Simply put, an insurer must be solvent in order for it to have sufficient funds to meet the obligations it faces under current and future claims that may be made against it. The total solvency ratio is calculated by comparing the insurer’s current assets weighted against the value of its current liabilities. If an insurer has insufficient funds to do this it will be made insolvent which puts the policyholders at risk of reduced payments of claims or potentially no payment in respect of future claims.

This measures a company’s financial health and ability to meet its financial obligations and likelihood of having to declare insolvency bankruptcy. If an insurance company is not solvent it may no longer function as an insurer for new policies and prospective clients would be unlikely to wish to take policies out with an insurer that couldn’t meet its obligations in the event that they had to make a claim anyway.

How does an insurance company ensure that it remains solvent?

The best way for an insurance company to remain solvent is for it to properly manage the risk that it underwrites with regular cash flow coming in so that it is always has a good solvency position and in a position to be able to make payments to policyholders in any eventuality, though this may not be possible in every circumstance particularly if there is a rush of claims made due to a major natural disaster where the insurer is highly exposed to a particular type of risk.

With this in mind insurers use insurance actuaries to model risk so that they can better understand the risk associated with any individual policy and take positive steps to ensure that the level of premium charges is balanced against the actual level of risk that is being underwritten.

Actuaries are highly trained professionals and understand risk management to a high degree so their job is to mitigate the risks involved for an insurer with regard to specific policies.

Compare over 200 auto insurance companies at once!

 Secured with SHA-256 Encryption

Are there external bodies that make sure insurers remain solvent?

Yes and no, there are regulatory bodies in the United States that operate on a state by state basis that try to ensure than an insurer is being financially responsible, and have powers to take action against an insurer if there are areas of concern regarding their solvency.

Similarly there are external auditors and ratings agencies that try and gauge an insurer’s solvency and keep this information on their solvency status in the public domain to encourage the insurer to practice responsible risk management.

However no single body has the power to require an insurer to remain solvent and its solvency depends very much on the risks involved and the number of claims that are made against the insured risks.

Free Auto Insurance Comparison

Compare over 200 auto insurance companies at once!

 Secured with SHA-256 Encryption