What is the definition of Risked-Based Capital?
Risked-Based Capital refers to the necessity for insurance companies to look at the level of risk inherent in the lines of insurance sold and capitalize the company accordingly. This means that the company will need less capital if its lines of insurance products are of the low-risk variety (such as property lines). On the other hand, if they cover high-risk insurance products (such as liability), they will need increased levels of capital.
The insurance company has to know this in order for it to prepare and know what capital it needs to raise in order to support its operations.
When assessing risks, four aspects are evaluated. These include credit risk (the risk vis-a-vis the company's obligations to policyholders, creditor, suppliers and reinsurers), asset risk (the risk that an asset will depreciate or default in its payments), off-balance sheet risk (the risk caused by contingent liabilities or disproportionate rates of growth, among others) and underwriting risk (the risk of setting the wrong premium rates or underestimating current liabilities).
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- Rollover
- Salvage
- Schedule
- Secondary Market
- Section 1035 Exchange
- Section 415
- Securities and Exchange Commission (SEC)
- Securities Outstanding
- Securitization of Insurance Risk
- Segregated Account
- Risk Retention Groups
- Risk Management
- Risk
- Rider
- Revocable Beneficiary
- Return on Equity
- Retrospective Rating
- Retrocession
- Retention
- Residual Market