DEFINITION of 'Free Asset Ratio - FAR'

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

BREAKING DOWN 'Free Asset Ratio - FAR'

For example, suppose an insurance company has admitted assets of $100 million and liabilities of $80 million. Also, suppose the minimum solvency margin is 10%. In the case of this company, that would equal $10 million.

So for this company, the free asset ratio (FAR) is:

($100 million - $10 million - $80 million)/$100 million = .10, or 10%.

Sometimes FAR is calculated without subtracting the minimum solvency amount. In this case, the FAR for this company would be 20%.

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 immediate injection of capital.

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