Simply put, an insurance company should be solvent in order for this to have adequate funds to match the commitments it faces under present and future claims which may be made against it.
If an insurance provider isn’t solvent it may not function as underwriter for new policies and potential customers would be unlikely to want to take policies outside with the underwriter that couldn’t match its duties in the event they needed to make a claim anyhow.
How can an insurance company ensure that it remains solvent?
The simplest means for an insurance provider to stay solvent is for it to correctly handle the risk it underwrites so it is constantly in a position in order to make payments to policy holders in any contingency, though this might not be feasible in every circumstance especially if there’s a rush of claims made due to some major natural disaster where in fact the insurance company is extremely exposed to an unique kind of risk.
With this in mind insurance actuaries are used by insurers to model risk so they could better understand the risk associated with any individual coverage and take positive measures to ensure the amount of premium costs is well-balanced against the real amount of risk that’s being underwritten.
Actuaries are highly skilled professionals and so their occupation would be to mitigate the dangers involved for an insurance company with regard to particular policies understand risk management to a higher level.
Are there outside bodies which make sure insurance companies stay solvent?
Similarly there are outside auditors and ratings agencies that attempt and estimate an insurer’s solvency and keep this data in the public-domain to support the insurer to practice responsible risk management.
However no body has the ability to require an insurance company to stay solvent and it depends greatly about the dangers involved and the amount of statements that are created against the dangers.