what is insolvent?

Hi,

For an insurance company, what is the meaning of insolvent?

I can think of 2 possible definitions.

Definition1:
PV of assets on supervisory basis < PV of liabilities on supervisory basis

Definition2:
Supervisory reserve + solvency margin + free asset < PV of liabilities on supervisory basis

Thanks

 

Ask George Osbourne, he knows what it is. He's looked at the books!

 

I think it's a matter of degree.
Your definition 1 is quite a severe one.
Another example would be:

Supervisory asset value < Value of liabilities + required solvency margin

This is less severe than your definition, but will provide (to the regulator) evidence that the insurer may be heading for trouble.

Breaching your definition 1 would probably lead to drastic intervention by the regulator to stop things going any further wrong, to protect the public.

Ultimately (most severe) would be when the insurer has no more money left (zero assets) but still has liabilities it has to pay out on.

But this is never reached because the other less severe "solvency tests" cause actions/interventions by the regulator to make sure it doesn't.

(Not sure your second definition makes much sense, though??)

You can find a bit of a discussion on this in the notes chapter 21 section 5.