Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What does solvency refer to in the context of insurance?

1. The ability of an insurer to attract clients

2. The ability of an insurer to pay all insured losses

3. The financial investments made by the insurer

4. The market share held by the insurer

The correct answer is: The ability of an insurer to pay all insured losses

Solvency in the context of insurance specifically refers to the ability of an insurer to meet its long-term financial commitments, which primarily includes being able to pay all insured losses as they come due. This is a critical measure of an insurer's financial health and stability. If an insurance company is solvent, it means that it has sufficient assets and reserves to cover its policyholder's claims, which is essential for maintaining trust and reliability within the insurance market. The focus on an insurer's capacity to honor claims protects policyholders and ensures that they receive compensation when a loss occurs. This concept is vital for the overall functioning of the insurance industry, as it helps to maintain consumer confidence and regulatory compliance. Additionally, solvency is often monitored through various metrics, such as solvency ratios, which quantify the insurer's ability to cover its liabilities with its available assets.