Best's Capital Adequacy Relativity (BCAR)

Categories: Metrics, Insurance

It sounds a little like an old time patent medicine, like "Eliminate Rheumatism and Night Hoss with Best's Capital Adequacy Relativity and Tonic: Now with More Frog Intestine!"

In reality, it's a way to evaluate the health of insurance companies. The technique was devised by the financial rating agency A.M. Best (hence the "Best's" part of the term). It compares the strength of a particular company's capital situation with the industry as a whole. Basically, an industry group is analyzed, and a composite strength index is derived. Then individual companies are compared to the composite to see where they fit versus the typical company in the sector.

It works a bit how Wins Above Replacement (WAR) or Wins Above Average (WAA) work in sports analysis. In both cases, you're comparing an individual performance versus a benchmark derived by figuring out what kind of performance might be typical among other members of the group.

Find other enlightening terms in Shmoop Finance Genius Bar(f)