The formula for calculating FAR is:
FAR = (Total Assets – Secured Assets) / Total Assets
An insurance company must maintain certain financial reserves on hand to cover its obligations to its policyholders. The insurance company invests in assets that produce income for the company. A portion of these assets is pledged to secure the obligations of the company. The remaining portion is free assets.
For example, if Company XYZ has $1,000,000 in total assets and $700,000 of that are liabilities tied to policies, then its free asset ratio is 30%.
1,000,000 - 700,000 = 300,000
300,000 / 1,000,000 = 0.3 = 30%