Glossary

A cap is an agreement obligating the seller to make payments to the buyer, with each payment based on the amount by which a reference price (or level) or the performance (or value) of one or more underlying interests exceeds a predetermined number, sometimes called strike rate or strike price.

Capacity refers to the largest amount of insurance or reinsurance available from a company or the market in general. Capacity is determined by financial strength and is also used to refer to the additional amount of business (premium volume) that a company or the total market could write based on excess (unused) capital—that is, surplus capacity.

In captive insurance, capital has one of three different meanings: the amount initially needed to set up a captive or the initial amount paid in; the total of this paid-in capital plus other forms of capital, like letters of credit; or the sum of these two plus accumulated surplus. The difference between capital in a captive and other forms of insurance capital is that the owners usually consider it risk capital, ready to be used up by adverse results of the business. This is why one seldom hears about "impairment of capital" in captive financial discussions. Instead, one hears about "reduction in capital."

Capital adequacy refers to the funding required of a risk financing vehicle, such as a captive insurance company, to meet the liabilities insured. With regard to enterprise risk management (ERM), the term refers to the amount of capital needed to satisfy a specified economic capital constraint (e.g., a certain probability of ruin), usually calculated at the enterprise level.

Capital allocation is the actual deployment of capital to different business segments.

A capital asset pricing model (CAPM) is an asset valuation model that describes the relationship between expected risk and expected return for marketable assets. The CAPM states that the intercept of a regression equation between an asset's returns and the returns of systematic factors equals 0 percent in an efficient market, but it does not necessarily assume a single source of systematic risk.

Capital attribution is the assignment of enterprise-level capital to the various business segments (e.g., lines of business, regions, projects) that make up the enterprise in recognition of the relative risk of each segment for purposes of measuring segment performance on a risk-adjusted basis. This analysis can be useful in enterprise risk management (ERM).

Capital at risk is capital that is available to support the retention of risk by a self-insurer or underwriter of risk. Such "risk capital" may be required in a captive insurance company for payment of losses in the event that premium collected is insufficient to pay losses and expenses. Typically, it is an amount in excess of statutory capital and can therefore be used as collateral to ceding companies. May also be referred to as surplus funds or risk-bearing capital.

Capital markets are the institutions in which financial instruments such as stocks and bonds that mature in more than 1 year are created and traded.

Capital stock refers to the ownership of a corporation as expressed in individually or jointly held shares of stock.