Free Asset Ratio - FAR

AAA

DEFINITION of 'Free Asset Ratio - FAR'

A metric used to determine whether an insurance company has sufficient free capital to fully cover its financial obligations. The free asset ratio (FAR) is calculated by subtracting the required minimum margin of solvency from available assets and dividing this figure by admissible assets. The higher the FAR, the better the capacity of the insurer to cover its policy liabilities and other obligations.

INVESTOPEDIA EXPLAINS 'Free Asset Ratio - FAR'

Free asset ratios furnished by different insurance companies may not always be comparable, as they may use differing assumptions and interpretations in calculating free assets and valuing liabilities. Nevertheless, a high FAR would generally indicate a strong financial position and surplus capital, while a low FAR would imply a weak balance sheet and possibly a need for imminent injection of capital.




RELATED TERMS
  1. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  2. Life Insurance

    A protection against the loss of income that would result if ...
  3. Liability

    A company's legal debts or obligations that arise during the ...
  4. Asset

    1. A resource with economic value that an individual, corporation ...
  5. Controlled Insurance Program (CIP)

    An insurance policy which consolidates coverage for contractors ...
  6. Chain Ladder Method (CLM)

    A method for calculating the claims reserve requirement in an ...
RELATED FAQS
  1. How is accounting in the United States different from international accounting?

    Despite major efforts by the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board, ... Read Full Answer >>
  2. Which financial statements are most important when performing ratio analysis?

    Financial ratio analysis is an important aspect of fundamental analysis for any party engaged in value investing. Financial ... Read Full Answer >>
  3. What are some of the advantages and disadvantages of DuPont Analysis?

    DuPont analysis is a potentially helpful tool for analysis that investors can use to make more informed choices regarding ... Read Full Answer >>
  4. Can unearned rent be considered deferred revenue?

    Unearned rent can be considered deferred revenue from the perspective of a landlord or rental company, if that landlord or ... Read Full Answer >>
  5. How do you account for changes in the market value of various fixed assets?

    A company can account for changes in the market value of its various fixed assets by conducting a revaluation of the fixed ... Read Full Answer >>
  6. What is the difference between direct costs and variable costs?

    Direct costs and variable costs are expenses associated with production. Direct costs are expenses that can be directly traced ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Industry Handbook

    In this feature, we take an in-depth look at the various techniques that determine the value and investment quality of companies from an industry perspective.
  2. Insurance

    15 Insurance Policies You Don't Need

    Learn how to save money by saying "no" to unnecessary coverage.
  3. Savings

    6 Retirement Savings Tips For 45- To 54-Year-Olds

    Now is the time to kick savings into high gear. Find out how.
  4. Taxes

    9 Penalty-Free IRA Withdrawals

    If you need to take early distributions, find out which exemptions allow you to avoid expensive consequences.
  5. Retirement

    Variable Vs. Variable Universal Life Insurance

    Do you know why you might need one policy versus the other? Read on to find out.
  6. Economics

    What is Adverse Selection?

    Adverse selection occurs when one party in a transaction has more information than the other, especially in insurance and finance-related activities.
  7. Economics

    Understanding Carrying Value

    Carrying value is the value of an asset as listed on a company’s balance sheet. Carrying value is the same as book value.
  8. Economics

    International Financial Reporting Standards (IFRS)

    International Financial Reporting Standards are accounting rules and guidelines governing the reporting of different types of accounting transactions.
  9. Economics

    Explaining Property, Plant and Equipment

    Property, plant and equipment are company assets that are vital to business operations, but not easily liquidated.
  10. Economics

    How to Calculate Trailing 12 Months Income

    Trailing 12 months refers to the most recently completed one-year period of a company’s financial performance.

You May Also Like

Hot Definitions
  1. Venture-Capital-Backed IPO

    The selling to the public of shares in a company that has previously been funded primarily by private investors. The alternative ...
  2. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  3. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  4. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  5. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  6. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
Trading Center