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.

RELATED TERMS
  1. Admitted Assets

    Admitted assets are assets of an insurance company that are permitted ...
  2. Liquidity Ratios

    Liquidity ratios are a class of financial metrics used to determine ...
  3. Quick Liquidity Ratio

    Quick liquidity ratio is the total amount of a company’s quick ...
  4. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
  5. Adjusted Liabilities

    Adjusted liabilities are used in the insurance industry to show ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
Related Articles
  1. Investing

    Liquidity Measurement Ratios

    Learn about the current ratio, quick ratio, cash ratio and cash conversion cycle.
  2. Investing

    6 Basic Financial Ratios And What They Reveal

    These formulas can help you pick better stocks for your portfolio once you learn how to use them.
  3. Investing

    Analyzing Oracle's Debt Ratios in 2016 (ORCL, SAP)

    Learn how the debt ratio, debt-to-equity ratio and debt-to-capital ratio are used to evaluate Oracle Corp.'s liabilities, equity and assets.
  4. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  5. Investing

    Key Financial Ratios to Analyze Airline Companies

    Examine some of the most important financial ratios and performance metrics investors use to evaluate companies in the airline industry.
  6. Investing

    How to Analyze a Company's Financial Position

    Find out how to calculate important ratios and compare them to market value.
  7. Investing

    Key Financial Ratios for Retail Companies

    Using the following liquidity, profitability and debt ratios, an investor can gather deeper knowledge of a retail company's short-term and long-term outlook.
  8. Investing

    Financial Ratios to Spot Companies Headed for Bankruptcy

    Obtain information about specific financial ratios investors should monitor to get early warnings about companies potentially headed for bankruptcy.
RELATED FAQS
  1. What is the formula for calculating the current ratio?

    Find out what makes up the current ratio, how to calculate it, and what the result can tell you about a potential investment. Read Answer >>
  2. What is the difference between the capital adequacy ratio vs. the solvency ratio?

    Understand the different applications for using the capital adequacy ratio and the solvency ratio, which are both equity ... Read Answer >>
  3. How can a company quickly increase its liquidity ratio?

    Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
  4. How do you calculate working capital?

    The formula for calculating working capital is straightforward, but lends great insight into the short-term financial health ... Read Answer >>
  5. What does a high times interest earned ratio signify with regard to a company's future?

    Learn how the times interest earned ratio affects the perception of solvency of a company, and what a high ratio can mean ... Read Answer >>
  6. If a company has a high debt to capital ratio, what else should I look at before ...

    Learn about some of the financial leverage and profitability ratios that investors can analyze to supplement examining the ... Read Answer >>
Hot Definitions
  1. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  2. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  3. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  4. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  5. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center