Solvency

IN GENERAL TERMS, solvency is the state of having more assets than liabilities. To be solventmeans that one is in the state of solvency. In general, you cannot answer the question “How solvent is the company?” because

solvency-insolvency is a two-state space. However, in a decision process you may need a more flexible view. Theoretically, this can be done using fuzzy set theory. Fuzzy set theory, see, for example, Derrig and Ostaszeewski (2004), erases the distinction between the twostate space and replaces it with a probability distribution that gives the likelihood that an element is a member of a particular set. In practice, this depends on the jurisdiction the company is in, and how the regulator defines the theoretical solvency levels. If the company has assets larger than some of these theoretical levels, then the company is in a “regulatory solvency state,” satisfying the statutory financial requirements.