Final answer:
Insurance companies need to maintain a minimum level of qualified assets to demonstrate solvency, ensuring they can cover potential claims and meet their financial obligations.
Step-by-step explanation:
Insurance companies must maintain a minimum level of qualified assets to demonstrate solvency. This is because they need sufficient assets to cover potential claims, ensuring they can meet their financial obligations. Insurance companies derive income from insurance premiums and investment income. They invest the funds not paid out in claims into safe, liquid investments to generate a rate of return and to have ready access to funds in the event of major claims. The average person's payments into insurance must cover their claims, the costs of running the company, and allow for the firm's profits. Adequate assets are essential for maintaining the trust of policyholders and ensuring the stability of the company during unexpected events.