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Definition: Free Asset Ratio (FAR)
The insurance companies’ use Free Asset Ratio to determine if they won enough free capital to cover the company’s financial obligations. It measures market value of company’s asset with respect to its policy liabilities. If the ratio is negative then the company would not be able to make necessary payments to the policy holders who are near to maturity.
Free Asset Ratio is a financial standing type of measure, which represents the insurance company’s financial status in the market.
FAR = (Total Assets – Secured Assets) / Total Assets.
A portion of the assets of an insurance company is pledged for securing policy obligations of the company. The remaining portion of FAR is very high, the company is making good profits and has a high extra capital and it can expand.