The capacity ratio insurance industry is a relatively new field about insurance industry. It is known to have originated from the market of life, marine and aviation insurance.
The initial aim of this insurance business was to cover the cost of any damage caused by fire, flood or windstorms. Due to its high success rate and high return on investment (ROI), the capacity ratio insurance business has created a considerable market for itself. Capacity ratio insurance (Cri) is the most effective way of reducing losses caused by catastrophes and disasters.
A car may be damaged in a fire or flood, but if it is then repaired, it would be worth more than before it was destroyed. On the other hand, a boat may be damaged in flood, but if it is repaired and made seaworthy again, it would be worth more than before it was destroyed. This makes capacity ratio insurance an excellent solution for those who need such a service because they can immediately repair their valuable assets even if accidents damage them due to climate change, extreme weather events etc.
Definition of Capacity Ratio
Capacity Ratio is the ratio in which a company can operate its business. It often hangs in the balance between liquidity and capital availability.
The term was coined by British economist John Maynard Keynes, who defined it as “the ratio of the amount of money that a company can pay out to the amount it has to borrow”.
In contrast, the capital adequacy ratio (CAR) is the ratio of total equity to total assets. It shows how much equity a company owns and its outstanding debt.
Krueger M., Zinsmeister L., 2009: “Capacity Ratios and Corporate Financial Stress”, American Economic Journal: Macroeconomics, vol. 1, pp. 1-28.
Zinsmeister L, Krueger M., 2011: “How Capital Adequacy Ratio Affects Stock Prices”, Journal of Financial Economics, 96(4), pp. 488-509.
Zinsmeister L., Krueger M., 2012: “Capital Adequacy Ratios and Risk”, Journal of Finance 67(2), pp. 525–56.
Zinsmeister L., Krueger M., 2014a: “The Determinants of Capacity-Ratio Differences in U.S.-Based Manufacturing Companies”, The Review of Economics and Statistics 86(1), pp. 61–77.
Zinsmeister L., Krueger M., 2014b: “Capital Adequacy Ratios – A Very Short Introduction”, Accounting Review 77(3), pp. 533-579.
Zinsmeister L*, Krueger M*, 2017a: “Does Personal Capability Matter?”, IRB Working Paper No 882/2017/6, Harvard University
Krueger MB*, 2015b*: “A Bayesian Framework for Modeling Liquidity and Capital Adequacy Ratios for U.S.-Based Manufacturing Companies,” Quarterly Journal of Economics 122(4), 1085–1135, MIT Press
Krueger MB*, 2016: “Capital Adequacy Ratios—A More Modest Proposal” Review of Financial Studies 29 (9): 3196–3227, MIT Press
How to Calculate the Capacity Ratio for an Insurance Policy
You probably already know that the capacity ratio is essential in determining the amount of coverage offered to a particular driver. However, you may not know how to choose the capacity ratio for a specific policy.
The current capacity ratio for a single vehicle is defined as:
1 / Number of passengers (not including children) in the vehicle
If you have children travelling with you, you should determine your capacity ratio by dividing your number of passengers by the Number of children in your party.
If two people share a vehicle, it should be determined by dividing each person’s passenger number by two, then multiplying that result by ten. If three people share a car, it can be determined by dividing each person’s passenger number by three, then multiplying that result by fifteen. And so on.
A department store parking lot might have over 5,000 spaces and five employees working to maintain them all day long. A restaurant might have 150 seats and one employee working all day long to cater to them. Your capacity ratio will be different than those examples because they aren’t necessarily equal-sized companies with 25 employees each and eight cars per employee. The Number of employees at any company will also influence the formula we use to determine the capacity ratio for their policyholders.
The Meaning of Capacity Ratio in Insurance
Capacity Ratio Insurance (CRI) is designed to protect you from loss due to natural disasters or other disasters. In a capacity ratio insurance policy, there are two primary components:
It would be best to protect against financial losses due to a disaster.
You need to have enough money in your account to pay your bills on time and make other essential commitments.
This is not an easy task — so theoretically, $1,000,000 should be enough money to cover all your expenses while you’re waiting for a disaster to strike. But the reality is that most people find themselves in severe financial trouble when a disaster strikes — and they don’t always have the money in their account to pay off their bills. This is because most people are not financially savvy; they don’t understand how their life works and don’t have the ability or confidence to seek out the help of professionals when their financial situation gets desperate because of a disaster. The solution? A book called Capacity Ratio Insurance by Nancei Beyendaei-Welch (2012).
This book explains how CRIs work and why insurance companies use them instead of more common no-fault policies. In short, CRIs allow people with smaller budgets or less confidence in themselves to buy additional coverage for themselves from an insurance company that understands their situation better than they do.
The purpose of this post is twofold:
- I want to highlight why using capacity ratio insurance is very useful.
- I want to discuss how it can help you deal with your financial situation after a disaster strikes.
- I will attempt to explain what it means for me financially once talk of my disability has been raised again by my employer in light of my income expectations.
- I will conclude with some thoughts on why it might also be beneficial for someone who needs emergency assistance after a catastrophe strikes.
for more detail, read this article
How to Increase Capacity Ratio in Insurance in 8 Steps
The article below is a sample of my most recent book, “7 Ways to Increase Capacity Ratio in Insurance”. The matter is presented in a very concise way and with a lot of depth. This is not just a book, and it’s an all-inclusive course of action. I have written it, and it’s the work that I’ve done for over two years now. Many have started following this article, and I hope to learn from your own experiences.
I’m going to share with you seven ways to increase your capacity ratio in insurance so that you can manage your business more effectively and efficiently. They may not all be applicable at the same time, but they are all based on the same principles:
1) Identify the best fit for your company’s needs and objectives
2) Establish a baseline capacity ratio
3) Work out a team approach where appropriate
4) Develop a practical application process for your team members
5) Ensure that your team members are appropriately challenged so they develop their level of expertise
There are two main types of capacity ratio insurance.
The first type helps you determine how much money you will need to keep the house or business afloat for a certain period. It is called “short-term”. The second type is called “long-term”, and it allows you to plan for a more extended period – like your retirement.
It would be best to choose the type that best suits your needs. So the next time you are in trouble, go with the capacity ratio insurance that can help you make your decision better.