What does Free Asset Ratio mean?

Free Asset Ratio is basically a method which is employed by insurance companies, method by which they determine whether there exists enough free capital or value so that the institution’s financial obligations can be fully covered. This ratio basically will determine whether the company’s assets and the liabilities are in a comparatively positive proportion. In case there is a negative aspect ratio, that means the company cannot actually take anymore hazards and has to limit its investments. In a contrary case the company is heading towards such great losses it won’t be able to make the necessary payments towards those policy holders whose insurance is getting close to maturity.

Free Asset Ratio explained

Free Asset Ratio can be called a financial standing type of measure, which actually establishes the insurance company’s financial status on the market. The ratio itself is being calculated as follows: from the available assets there is subtracted the required minimum margin of solvency, which is then divided to the admissible assets. Certainly there are differences among companies in calculating this ratio, as there are several institutions which will also take into consideration ulterior profits, but definitely where there is shown a high ratio, that means that the company is making good profits and has a high extra capital.