The term underwriting capacity refers the amount of insurance one individual insurance company, or the complete insurance market, in a particular place or country, can take on. Short-term insurance companies in South Africa provide different types of cover such as car insurance, householders – and house owners insurance. Their capacity to take on more insurance business, or new clients, is limited to the extent of their financial strength.

Capacity in simple terms is the supply of insurance available in the market to meet the demand from people looking for insurance. Legally insurance companies need to maintain certain financial ratios or measurements to ensure that they remain profitable. One such important ratio is the insurer’s capital relative to its exposure to risk. Insurance companies need to maintain a sufficient level of capital to take on risks.

Think of the enormous impact the World Trade Centre terrorist attack had on the insurance industry’s capacity at the time. When capacity is reduced by huge disasters such as this the industry must rebuild capacity through methods such as an increase in income, raising more capital and taking on favourable business. Inevitably it will result in an increase in insurance premiums.

In individual cases where one insurance company is asked to take on a big risk, for example insure a fleet of cars, that will exceeds its capacity, it can look for reinsurance from other companies to spread the risk.