Risk-Based Capital

The US formulas computing minimum insurer capital from the riskiness of assets, reserves, and business written.

Overview

Adopted by the NAIC in the early 1990s after insolvency waves, the charges penalize equities and low grade bonds through asset risk, counterparty exposures through credit risk, and reserve and growth uncertainty through underwriting risk, with covariance crediting for diversification since risks rarely strike together. Ratios of adjusted capital to the requirement trigger escalating regulator action levels, from company notice to mandatory control, letting intervention start before failure. Separate formulas serve life, property casualty, and health insurers. Large companies hold multiples of requirements, and critics debate how well the 1990s formulas fit modern long duration bonds and actuarial judgment, feeding periodic modernization proposals.