Why is 'solvency' a critical aspect for an insurance company?

Solvency is essential for an insurance company because it directly signifies the company's ability to pay out claims and meet its future financial obligations. Being solvent means that the company has sufficient assets to cover its liabilities, ensuring that it can maintain adequate cash flow to settle policyholder claims and debts as they arise. This financial stability is critical for maintaining trust with policyholders and ensuring the long-term viability of the insurance company.

Without solvency, an insurance company risks bankruptcy, which would prevent it from fulfilling its commitments to clients. Clients depend on the assurance that their claims will be settled, so a strong solvency position is fundamental for the insurance firm's reputation and operational success.