Relationship between Solvency and Financial Ratios in Iranian Insurance Institutions

Abstract. Obviously a major concern for regulatory bodies and for insurers in today's insurance industry is to make sure that all obligations of the insurance company are duly met. An existence of a solvency system influenced by all risks that an insurer is faced with seems necessary as an effective tool for insurance regulation. The main objective of this study is to investigate any relationship between solvency system and those financial ratios representing all risks that an insurer is exposed to. The present article attempts to answer the question that whether the system of solvency adopted in Regulation No. 69 is sensitive to the risks or not. In case of no relationship, a serious shortcoming in the model is induced. For statistical analysis, a time period of 1389 to 1391 including a sample of 22 insurance companies is considered. The research methodology consists of a multiple regression analysis using panel data. The results indicate that there is a significant relationship between the solvency ratio and the selected financial ratios including current ratio, equity ratio, reserves ratio and loss ratio among which equity ratio has the highest meaningful correlation with the solvency ratio.