Life & Health Insurance Practice Exam 2025 – Your All-in-One Guide to Exam Success!

The correct answer is liquidity because it refers to a company's capacity to meet short-term obligations and unexpected payouts to policyholders. In the context of insurance, liquidity is crucial because policyholders might present claims that need to be settled quickly, and an insurance company must have sufficient liquid assets on hand to ensure that these claims can be paid promptly.

While reserves are important for setting aside funds specifically for future claims, liquidity goes a step further by ensuring that the company can access those funds and convert assets into cash as needed. Capitalization relates more to the overall financial strength and funding sources of the company, reflecting its capacity to grow and invest, rather than its immediate ability to handle payouts. Net worth represents the total assets minus total liabilities and is a measure of long-term solvency, rather than short-term financial flexibility. Thus, while all these factors contribute to a company's financial health, liquidity specifically highlights its immediate ability to handle unpredictable claims and financial demands.