Clothing physics clipping

I have a modular character with separate clothing, body parts, hair, etc. I’m having trouble understand how the physics assets work together. For example my character’s body has it’s own physics assets with the physics capsules being smaller than the character’s limbs. Then the separate clothes pieces such as shirt and pants both have their own physics assets. However when animating the character some parts of the body will clip thru the clothes and I’m not sure why.

Should the character’s physics capsules on the body extend beyond the character’s skin? And what about the clothing physics capsules? Should those be larger or smaller? I feel they are bumping into each other causing clipping. Which capsules should be bigger the character’s limbs or clothes?