What does the term "capacity" refer to in insurance?

In the context of insurance, "capacity" specifically refers to the amount of business an insurer can write. This term encompasses the insurer's capability to underwrite risks and issue policies while maintaining financial stability.

Capacity is determined by various factors, including the insurer's financial resources, claims history, regulatory limitations, and the reinsurance agreements in place. A higher capacity allows an insurer to take on more policies or larger risks without compromising its solvency or ability to pay claims. Understanding capacity is crucial for agents and brokers when placing coverage, especially in specialty lines like surplus lines, where the insurers often have limited capacity for certain risks.

The other options, while related to the insurance industry, do not accurately define "capacity." Market demand for insurance, risk exposure, and the processing of claims are all important aspects of the insurance business, but they do not specifically describe what capacity refers to in this context.