Free Asset Ratio - FAR
Categories: Metrics, Company Valuation
Free asset ratio, or FAR, is a metric that helps life insurance agencies (and others) see if they have enough capital to cover their contractual obligations. The bigger an insurance company’s FAR is, the more easily it can cover all of its policy payouts.
Mathematically, FAR is (admitted assets - liabilities - minimum solvency margin) over admitted assets.
You can see where this goes: it’s basically what the company has, minus its debts, divided by what the company has. The smaller the debts (liabilities and minimum solvency margin) and the bigger the on-hand assets, the bigger FAR will be.
How FAR will life insurance companies make it? FAR will tell you. Well, in the UK at least, where this metric is mostly used.