In financial risk learning series, we are discussing about solvency risk. Solvency risk is the part of financial risk like liquidity risk. In this risk, company is not capable to pay his debt. Sometime, you can confuse about liquidity risk and solvency risk. Actually both are two side of coin and its name is risk. If you did not have cash in pocket to your expenses, it will be liquidity risk but company is not capable to pay debt, it will be solvency risk. Solvency risk is more dangerous risk than liquidity because, if you have not cash, you can borrow for paying debt but if your liabilities are more than your assets, at that time nobody will give you loan and your organization become insolvent. It is quite opposite word of solvent. Company’s main target should be minimizing solvency risk. Company should continue analyze its balance sheet to investigate before happening risk in reality.
In insurance sector, the check the solvency of assets or party is very important for providing the facility of insurance to right candidate.
If you are responsible to manage solvency risk, you can do with following Solvency Measures:
■ Minimum Capital
■ Solvency Capital