In general terms the “capital” of a company is the total equity of the shareholders of a “stock” insurance company. This figure can be calculated in terms of the difference between the insurance company’s assets and liabilities.
Why is capital an important part of understanding an insurance company?
The capital value of an insurer represents its ability to deal with large volumes of claims, the capital value is a measure of the insurers means to meet its obligations. Thus the more capital an insurance company has the larger the level of risk that it can insure.
What happens if an insurance company has no capital?
An insurer without capital is effectively insolvent, this means that in the particular instance when an insurance company runs out of capital it has exceeded its ability to meet the claims before it, and has no further funds through which it can pay benefits.
What does an insurer’s capital mean to a policy holder?
For policy holders the level of capital in an insurance company is important only in the instance that a large volume of claims are made at one time. In ordinary circumstances an individual policy can normally be met in the due course of operation for an insurer, and they may have underwritten some of the risk with other insurers in the case of large risk exposures.
However if an insurance company finds itself short of capital a policy holder is at some risk that their policy’s obligations may not be able to be met.
What happens in the event of an insurance company being found insolvent?
In the case where an insurer runs out of capital, it will no longer be able to operate as a functioning insurer until such time as it comes back out of insolvency (for example in the case that new owners are found, who are willing to supply an injection of capital to meet or settle any outstanding financial obligations to claimants and other creditors).
It’s worth noting that in the case of an insurance company the policy owner’s benefits are protected by the company’s capital and the needs of those policy owners/clients are paramount. So shareholders are prioritized behind policy holders and claimants in the event that an insurance company runs out of capital and is declared insolvent.