Risk-Based Capital in General Insurance

This paper looks at the problems of assessing, for solvency purposes, the capital requirements of a non-life insurer in the context of the United Kingdom. It considers how these capital requirements might vary according to the different risks to which an insurer is subject and how this Risk-Based Capital (RBC) might be measured in practice, using as a case study the RBC formula recently introduced in the United States of America. The paper also discusses the application of RBC concepts to the problem of internal capital allocation, to assist in measuring an insurer's rate of return to shareholders by business unit, as well as the more obvious regulatory application. The advantages and disadvantages of a formula-based approach to capital requirements for solvency purposes are discussed in comparison with possible alternative approaches to insurance supervisio