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What is Risk Based Capital?
Risk-based capital is a method developed by the NAIC to
measure the minimum amount of capital that an insurance company needs
to support its overall business operations. Risk-based capital is used
to set capital requirements considering the size and degree of risk taken
by the insurer. As the current measurement stands there are four major
categories of risk that must be measured to arrive at an overall risk-based
capital amount. These categories are:
Asset Risk
- a measure of an asset's default of principal or interest or fluctuation
in market value as a result of changes in the market.
Credit Risk -
a measure of the default risk on amounts that are due from policyholders,
reinsurers or creditors.
Underwriting Risk -
a measure of the risk that arises from under-estimating the liabilities
from business already written or inadequately pricing current or prospective
business.
Off-Balance Sheet Risk -
a measure of risk due to excessive rates of growth, contingent liabilities
or other items not reflected on the balance sheet.
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