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Risk-Based Capital
As the investment side of the insurance industry grew, regulators quickly learned that the existing standards of measuring a company’s solvency were somewhat antiquated. New investment products were increasingly difficult to qualify and quantify and old standards had no way of addressing these new products. With the demise of Fidelity Bankers Life Insurance Company, First Capital Life Insurance Company and Fidelity Bankers Life Insurance Company, regulators realized that changes had to be made. The most significant of these was the adoption of the “risk-based capital” model.

Risk-based capital (RBC) is a method of measuring the capital needs of an insurer based on the types of risk the company assumes. These risks are categorized into four groups: mortality risk, asset risk, interest rate risk and general business risk. Ultimately, the insurer is evaluated on the amount of capital in relation to amount of risk. Certain ratios are created and insurers that fall below certain benchmarks are subject to review.

When evaluating the financial stability of an insurance company, risk-based capital is simply one tool that regulators use. It is not an end-all measurement. RBC comparisons should not be made between insurers because RBC numbers do not tell a company’s entire story. Other tools, such as claims-paying ratings, should be used in addition to RBC numbers when practitioners evaluate insurers.

Last Updated: 9/23/2012 10:05:00 PM