When an individual or legal person such as a company is declared insolvent it refers to not having sufficient assets or financial resources to cover liabilities or financial obligations. When an insured business is declared insolvent, the insurer with which they are insured is still legally bound to its obligations in terms of the insurance contract.

The insolvency clause is applicable where there is a reinsurer involved in an insurance transaction. Should the direct insurance company be declared insolvent the reinsurer is still liable for his pro-rata share of any loss in terms of the contract between the insurers.

Any insurer is bound by legislation to ensure that their business is financially sound and they must always be in a position to meet their liabilities. The Financial Services Board (FSB) monitors the solvency of all registered insurers on an ongoing basis. Insurers have to supply the FSB with monthly financial returns and these are used by the FSB to determine solvency. Not all assets can be used to prove solvency and normally diversified assets are required. An insurance company must spread their assets carefully and there are laid down percentages for investments of the insurance companies assets in, for example, cash, shares and government bonds.