In insurance, capital adequacy refers to an insurer’s ability to meet its obligations, especially in adverse scenarios (e.g., high claim volumes, market crashes, catastrophes). It ensures that the company holds enough capital reserves to:
- Pay out claims.
- Remain solvent during stress conditions.
- Comply with regulations (e.g., Solvency II in the EU, Risk-Based Capital (RBC) in the US).
Regulators set capital requirements to protect policyholders and maintain the stability of the financial system.