What Does Risk-Based Capital Ratio Mean?
The risk-based capital ratio is a ratio of an insurance company's assets minus their liabilities. The purpose of this ratio is to make sure that an insurance company does not assume more risk than it can handle.
Generally, a ratio of 1.00 or higher is viewed as acceptable.
Insuranceopedia Explains Risk-Based Capital Ratio
If an insurance company assumes too much risk but doesn't have the capital to cover it, it can go bankrupt if too many claims are filed at once.
Tornadoes, hurricanes, and other natural disasters, for example, can cause a high volume of claims to be filed suddenly. In the even of such a high and sudden influx of claims, a good risk-based capital ratio protects both the insurance company and their policyholders alike from major financial hazard.