What term describes an insurer's capability to manage unpredictable payouts to policyholders?

The term that describes an insurer's capability to manage unpredictable payouts to policyholders is liquidity. Liquidity refers to the availability of liquid assets to a company, enabling it to meet its short-term obligations, such as the claims made by policyholders. For insurance companies, maintaining a strong liquidity position is crucial. It allows them to respond effectively to sudden spikes in claims or unexpected financial demands, ensuring they can pay out claims promptly and maintain their operations.

Insurance companies often face uncertainties in the timing and amount of claims, which is why a liquid asset base—such as cash or assets that can be quickly converted to cash—is essential. By having sufficient liquidity, an insurer can navigate periods of higher-than-expected claims without compromising its financial stability or ability to serve its policyholders.