What is the definition of Capacity?

Capacity refers to the supply of insurance that is there to meet the market demand. All in all, it refers to the extent that the insurance industry has in the way of its ability to accept risk. Insurance companies should have enough capital in relation to its risk exposure, since this is an indicator of solvency, or the company's ability to pay off claims.

Insurance companies cannot just accept all insurance applications. It must first maintain a level of capital and policyholder surplus in order for it to accept additional risk exposure.

When a catastrophic event or a major calamity occurs, capacity is considerably reduced. Such is what happened after the 9/11 World Trade Center terrorist attack. However, capacity can be restored by raising more capital, increasing net income and passing on more of the risk to other reinsurers.

When the capacity is high, premiums tend to decline. However, with reduced capacity, the insurance companies may be forced to raise rates, tighten limits and conditions in order to improve its profitability.

• Insolvency
• Misstatement of Age or Sex Provision
• Modified Premium Policies
• Moral Hazard
• Comprehensive Coverage