Question

Which of the following statements about the use of risk-based capital requirements is (are) true?

1) Insurers must have a certain amount of capital depending on the riskiness of their investments and insurance operations.
2) Insurers may be required to take certain actions depending on how much capital they have relative to their risk-based capital requirements.

Answer 1

Risk-based capital requirements ensure that financial institutions have capital proportional to the risks they take, mandating actions if requirements are not met.

Step-by-step explanation:

The use of risk-based capital requirements is crucial in the regulation of banks and insurance companies, helping to ensure these institutions maintain adequate capitalization in relation to their risk profiles. This regulatory approach mandates that financial institutions must have a specific level of capital commensurate with the overall riskiness of their investments and insurance liabilities.

Moreover, insurers are indeed required to take certain actions if their capital levels fall short of these prescribed requirements, which could range from reducing risk exposure to raising additional capital.