Capital At Risk (CaR)

Every Sunday during football season, our capital is at risk in Slick Lou's NFL pool. But that's not what we mean here. In the financial world, the term actually refers to the amount of capital an insurance company has to put aside in reserves on the off-chance that a client will file a claim. This applies to companies who are self-insured for their employees' health benefits as well, as regular insurance companies that offer any kind of policy to consumers.

No matter how much research an insurance company does to determine what to charge customers in premiums, they need to set aside additional funds in case they have more-than-expected claims during a given year. All sorts of bad things could happen. There could be a flu epidemic. Or an outbreak of forest fires. Or the coast could get hit by multiple major hurricanes. If the company runs out of money to pay insurance claims, it would be forced to shut down.

So, companies carefully calculate how much they need to have in reserves as capital at risk, based on premiums expected to be collected and past loss experience. State auditors also check to make sure insurance companies have the right amount of capital in their reserves.

The term capital at risk is also used in regard to paying one's federal income taxes. The IRS wants you to have "skin in the game" if you want to claim income as a capital gain from the buying and selling of stocks. So, you must have capital at risk, meaning you have to use some of your own cash in order to invest, in order to get the capital gains rate.