Solvency

Solvency is the financial state of being able to meet long-term obligations, like a traveler having enough provisions to complete a lengthy journey. It is a measure of a company's or individual's ability to pay its debts and fulfill other financial commitments as they become due, without the need to liquidate assets or seek additional funding. Solvency is essential for maintaining trust, stability, and growth in financial markets and is closely monitored by regulators and investors.

Example

An insurance company must maintain solvency to ensure it can pay claims when policyholders experience covered losses. Regulators monitor the solvency of insurance companies by imposing capital requirements, conducting financial examinations, and requiring regular financial reporting. A company with a strong solvency position is better equipped to withstand economic downturns, fluctuations in the market, and unforeseen liabilities. A lack of solvency can lead to bankruptcy, financial distress, and loss of confidence among stakeholders.