What is the primary reason for having solvency requirements in an insurance company?

The primary reason for having solvency requirements in an insurance company is to protect policyholders and ensure that claims can be paid. Solvency requirements are set by regulatory authorities to ensure that an insurance company has sufficient financial resources to meet its future obligations, particularly in terms of paying claims when they arise.

When an insurer maintains adequate solvency, it demonstrates its ability to withstand losses and fulfill its contractual commitments to policyholders. This reassurance is critical in the insurance industry, as it fosters trust and confidence among consumers who rely on these policies for financial protection against unforeseen events. Therefore, the focus on policyholder protection forms the cornerstone of solvency requirements, ensuring that insurers remain financially stable and capable of honoring claims even in times of significant loss or catastrophe.

While enhancing reputation, ensuring competitive pricing, and maintaining regulatory compliance are important aspects of an insurer's business, they are secondary to the fundamental objective of safeguarding policyholders’ interests through effective solvency measures.