What it means
An insurer's promise is only as good as the capital behind it. Regulators and rating agencies each built tools to test that capital, and for much of the insurance world the reference test comes from the rating agency Best.
The result is expressed as BCAR, Best's Capital Adequacy Relativity. The idea mirrors bank capital analysis, with available capital, the surplus an insurer actually holds to absorb losses, on one side and net required capital, the amount its risks demand across its underwriting, investments, credit exposures and operations, on the other.
The relativity is the cushion between the two as a share of available capital: BCAR = (available capital - net required capital) / available capital x 100. A positive score means available capital exceeds the modelled requirement at that confidence level, while a score of zero or below signals a shortfall.
What distinguishes the model is calibration to insurance. Required capital is built risk by risk, covering the chance that underwriting loses money, that bonds default or equities fall, that reinsurers fail to pay, and that reserves prove inadequate, with factors tuned to insurance experience rather than banking rules.
Best's model documentation presents the measure as a core input to its financial strength ratings. The company runs the model at several confidence levels, such as the 95%, 99%, 99.5% and 99.6% levels, which correspond to stresses of roughly one in twenty, one in a hundred, and rarer years.
An insurer might look comfortable at the one in twenty year stress but thin at the most severe level, and the pattern across levels reveals how its risk is distributed. Rating analysts read the whole curve, not a single point.
Scores feed ratings, and ratings feed economics. A strong BCAR result supports a high financial strength rating, which lets an insurer win business from buyers and brokers who screen on security, and a weakening score invites questions long before any regulator moves.
The measure sits alongside, not instead of, statutory regulation, since insurance regulators run their own capital tests, such as risk based capital requirements in the United States, and an insurer typically manages to both frameworks at once. Management uses the model as a planning tool, not just a report card.
Capital raising, reinsurance purchases, investment allocation and growth plans are all tested against their effect on the score, so the rating agency's arithmetic quietly shapes the insurer's own decisions. For a manager, the lesson generalises beyond insurance, because capital adequacy is a relationship between what you hold and what your risks demand, and knowing which yardstick your counterparties watch, and managing to it deliberately, is part of the finance function, not a compliance afterthought.
In practice
Real-world examples.
Example
An analyst tracks an insurer's BCAR trend over five years as an early signal of balance sheet strain. A fall from 20 to 9 over that period would prompt questions about growth, reserves or catastrophe exposure.
Example
An insurer delays a dividend after projecting that payment would push its BCAR below its rating's expected range. The $40,000,000 dividend would have cut available capital, so the board waits until the score recovers.
Example
A broker's security committee requires carriers to maintain BCAR scores comfortably above the range associated with their target rating. The committee reviews the scores each year before renewing placements.
Formula
Calculation
BCAR = (available capital - net required capital) / available capital x 100. Net required capital sums modelled charges for underwriting, investment, credit and operational risks at a stated confidence level, and a positive score indicates capital in excess of the requirement.
Worked example: an insurer has available capital of $900,000,000 and net required capital of $750,000,000 at the most severe confidence level. BCAR = ($900,000,000 - $750,000,000) / $900,000,000 x 100 = $150,000,000 / $900,000,000 x 100 = 16.7. If a hurricane season raises net required capital to $820,000,000, BCAR = ($900,000,000 - $820,000,000) / $900,000,000 x 100 = 8.9, so the cushion shrinks by almost half. The assessment bands are set by the rating agency and depend on the score at each confidence level, so a single number is never the full picture.Case study
Seen in the real world.
Fictional example. A regional insurer called Cedarline Mutual reports available capital of $900,000,000 against a modelled requirement of $750,000,000, a BCAR of 16.7. After a hurricane season adds catastrophe exposure, the requirement rises to $820,000,000 and the score slides to 8.9. The risk committee responds with a reinsurance purchase to rebuild the buffer, and it checks the effect on both the rating agency model and the regulatory capital test. The insurer and figures are invented for illustration.
Watch out
Common mistakes.
- Reading one score without the stress ladder. A strong result at a mild confidence level can hide fragility at severe ones, and the shape across levels is the real information.
- Confusing it with regulatory capital tests. Rating models and statutory regimes weigh risks differently, and passing one does not guarantee passing the other.
- Treating it as static. Growth, market moves and reinsurance changes all shift both sides of the ratio, and a score is a dated snapshot of a moving balance sheet.
Questions
People also ask.
What is Best's Capital Adequacy Relativity?
It is AM Best's measure comparing an insurer's available capital with the capital its risk profile requires, expressed as a percentage and used as a key input to financial strength ratings.
What BCAR score is considered strong?
A positive score means available capital exceeds the modelled requirement at that confidence level, and higher scores at the most severe stress levels support stronger ratings.
Is BCAR the same as risk based capital?
No: risk based capital is a United States regulatory test, while BCAR is the rating agency's own model, and insurers generally manage to satisfy both frameworks simultaneously.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related