Which statement about RBC (risk-based capital) is true?

• A. It is a capital adequacy standard based on risk
• B. It guarantees insurer profits
• C. It eliminates regulator oversight
• D. It applies to all financial institutions equally

Answer: (A)

RBC is a capital adequacy standard that ties the amount of capital an insurer must hold to the risk it takes on. The idea is that riskier assets, underwriting activities, or other exposure types require more financial cushion, so the model calculates a required capital amount based on the insurer’s risk profile. Because the required capital varies with risk, this makes the framework truly risk-based and helps regulators gauge whether an insurer has enough solvency margin given its mix of risks.

It doesn't guarantee profits—earnings depend on underwriting results and investment performance, not on meeting a capital target. It also doesn’t remove regulator oversight; rather, RBC provides a formal measure regulators monitor, and a low RBC ratio can trigger supervisory actions. And RBC is not a one-size-fits-all standard for all financial institutions; it’s specifically used in the context of insurers (with other industries using their own risk-based or capital frameworks).