Risk-Based Capital
What Does Risk-Based Capital Mean?
Risk-based capital is the minimum amount of capital that insurance companies must hold to safeguard against their risks. This capital ensures that the company remains solvent and can meet all of its financial obligations. The National Association of Insurance Commissioners (NAIC) established the requirements for risk-based capital to help maintain the financial stability of insurance companies.
Insuranceopedia Explains Risk-Based Capital
Insurance companies often invest the money they receive from premiums. However, if they make too many investments that do not yield returns, they may face insolvency. This can also occur if they take on excessive underwriting or other types of risk. Since large numbers of people rely on insurance companies to cover their claims, the NAIC sets requirements for the minimum amount of risk-based capital that insurers must maintain. This required capital is determined based on a company’s asset risks, credit risks, underwriting risks, and off-balance-sheet risks.
