Overcapitalization means over capitalizing the assets of a company or a business entity. Overcapitalization occurs when a business entity issues more debt and equity as compared to the total worth of its entire assets. An overcapitalized company has to pay more in terms of interest than needed. In the same way an overcapitalized company has to pay more dividend to the share holder than required to be paid. There are a number of different kinds of solutions to deal with the problems arise through the overcapitalization of the company. The possible solutions may be restructuring the company, buying back the shares from the market and reducing the level of debt on the company.
Insurance market may also become a victim of overcapitalization and this occurs when the supply exceeds from the demand. The resultant exceed in the supply as compared to demand result in the formation of soft market which ultimately result in declining the insurance premiums from the level that was predefined and decided. These premiums will rise to the predefined level when the market stabilizes.
There is another concept that is called as undercapitalization which is totally opposite to the overcapitalization. Undercapitalization is a situation where the company is badly in need of credit to run its every day operations but the company has neither the cash flow nor any other source of credit to run its day to day operations depending upon cash. Most of the companies that have a high start up cost suffer from the situation of undercapitalization.