What does "solvency" mean regarding an insurance company?

The concept of "solvency" in the context of an insurance company is crucial because it directly relates to the company's ability to meet its long-term financial commitments to policyholders. This means that a solvent insurance company maintains sufficient assets to cover its liabilities, ensuring that it can pay out claims as they arise.

Being solvent indicates financial health and stability, which is particularly important in the insurance industry, where companies often need to settle large claims that can occur many years after a policy is sold. Solvency is a key indicator that regulators, investors, and policyholders consider to assess the risk associated with an insurance company’s capacity to fulfill its contractual obligations.

Choices related to market share, policy sales rates, or overall profitability do not specifically address the fundamental financial stability and long-term obligations crucial to the definition of solvency. While market share and profit may reflect an insurance company’s success or efficiency, they do not ensure that the company has the necessary resources to satisfy its future obligations to policyholders.