Capitalization of Property/Casualty Insurance Companies

To protect policy holders, healthy insurers need to have adequate loss reserves, strong capital bases and the ongoing ability to generate sufficient earnings to protect and build overall capitalization. Risks to capital can emanate from many different areas of a property/casualty insurer's operating environment, including insurance liabilities, off balance sheet liabilities, invested and other asset quality, financial risks and general business risk. These risks must be balanced against the insurer's resources available to pay claims. This paper identifies and considers the risks to and sources of property/casualty insurers' capitalization, discussing the method used by Standard & Poor's (S&P) to measure appropriate amounts of capital to support these enterprises at various levels of financial strength. Both quantitative and qualitative measures are part of the evaluation. Capital risks are identified an allocated according to the particular characteristics of particular lines of business or asset categories. The end result reflects the S&P analysts' subjective judgment as to how much weight is applied to different categories of risk for the particular situation involved. An example of the end result of the capital measurement process for a hypothetical insurance company is included.