Our Positions | Capital Adequacy

Risk-based capital is intended to provide a legally established level of capital and surplus for a particular insurer at which point specific regulatory actions should occur, based upon identified risks. One of the major inputs for this determination is the insurer’s actual capital and surplus as reported using U.S.

Statutory Accounting. RBC is a method to measure a minimum amount of capital that is appropriate for an insurer to support its overall business operations based on its size and risk profile. RBC is a regulatory tool to help regulators determine the financial health of an insurer, but a separate RBC formula has been developed for property/casualty carriers that is different than life and health. This is to reflect the differences between these business models. The formulas are periodically updated to reflect changes in the regulatory environment.

The Property and Casualty RBC formula was developed comprehensively. With the exception of catastrophe risk and operational risk, the factors were all determined in relationship to the primary underwriting factors for premium and reserves and the factors related to asset risk. In 2017 catastrophe risk and operational risk were added to the formula.

NAMIC Position

A solvency assessment system used by the states should be focused on the evaluation of the adequacy of an insurer’s financial resources to meet its obligations to policyholders at all times with a reasonable level of assurance. Solvency measures should be based on regulatory minimum solvency levels, rather than market-based solvency levels held for business objectives.

A solvency assessment system should account for the interaction and correlation among risks as well as the use of reinsurance, diversity of risk, and other risk-mitigation strategies of the insurer.

Capital adequacy standards should be clear, objective, and to the extent possible harmonized, where appropriate, across jurisdictions to minimize regulatory arbitrage. Standards should be set by supervisors in an open and transparent process that includes consultation with sectors of the industry that will be affected by the standards. Solvency standards for groups may recognize risk diversification and capital mobility to the benefit of members of the group; however, regulatory assessments of capital adequacy must be centered on the legal entity.

NAMIC News on Capital Adequacy


Erin Collins
Senior Vice President - State and Policy Affairs