Risk-Based Capital Ratio

What Does Risk-Based Capital Ratio Mean?

The risk-based capital ratio measures an insurance company’s assets minus its liabilities. Its primary purpose is to ensure the company does not take on more risk than it can manage.

Typically, a ratio of 1.00 or higher is considered acceptable.

Insuranceopedia Explains Risk-Based Capital Ratio

If an insurance company takes on excessive risk without sufficient capital to cover it, it risks bankruptcy if a large number of claims are filed simultaneously. This risk is one reason ratings agencies factor capital ratios into their evaluations of the best life insurance companies, since claims may not come due for decades after a policy is sold.

Natural disasters such as tornadoes and hurricanes can trigger a sudden surge in claims. In such cases, a strong risk-based capital ratio helps safeguard both the insurance company and its policyholders from significant financial harm. Buyers who want this protection often check financial strength ratings before comparing the best homeowners insurance companies, particularly in regions prone to severe weather.