Solvency II

What it is

Solvency II is the EU framework that sets how much capital insurers and reinsurers must hold and how they must be run and supervised. It is based on Directive 2009/138/EC and on Delegated Regulation (EU) 2015/35, and has applied since 1 January 2016. A review, Directive (EU) 2025/2, amends the regime, with most changes applying from 30 January 2027.

It rests on three pillars:

• Pillar 1, quantitative requirements: assets and liabilities at market-consistent values, technical provisions as best estimate plus risk margin, own funds, the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR).
• Pillar 2, governance: a system of governance with four key functions (risk management, compliance, internal audit and actuarial) and the Own Risk and Solvency Assessment (ORSA).
• Pillar 3, reporting and disclosure: quantitative reporting templates to supervisors, a regular supervisory report and a public Solvency and Financial Condition Report (SFCR).

Why it matters

Solvency II links capital to the risks an insurer actually takes, across underwriting, market, counterparty and operational risk. The solvency ratio, eligible own funds divided by SCR, is the headline measure watched by supervisors, analysts and rating agencies. Product design, investment strategy, reinsurance and dividends are all assessed against it.

Worked example

Illustrative numbers. An insurer calculates its SCR with the standard formula:

• market risk EUR 600 million, life underwriting risk EUR 400 million, counterparty default risk EUR 100 million: EUR 1,100 million before diversification;
• diversification benefit minus EUR 250 million, giving a basic SCR of EUR 850 million;
• operational risk plus EUR 50 million;
• loss-absorbing capacity of deferred taxes minus EUR 100 million.

The SCR is EUR 800 million. With eligible own funds of EUR 1,440 million, the solvency ratio is 1,440 / 800 = 180 percent. If an equity market fall cut own funds to EUR 1,200 million and the SCR to EUR 750 million, the ratio would be 160 percent.

Who uses it

• Actuarial Analysts compute technical provisions and the SCR and support the actuarial function.
• Life and P&C Actuarial Analysts model underwriting risks for their lines of business.
• Reinsurance Analysts measure the capital relief from reinsurance programmes.
• Regulatory Reporting Analysts produce the quantitative templates and the SFCR.
• Business Analysts (Insurance) translate requirements into data and system changes.

Common confusions

• Solvency II valuation and IFRS 17 measure the same contracts in different ways, for different purposes, so equity and profit differ.
• The SCR is a capital requirement. Technical provisions are liabilities and sit on the balance sheet.
• A solvency ratio above 100 percent is the legal minimum. Firms set their own target ranges well above it.
• Solvency II applies to insurers. Banks follow the CRR and CRD, and pension funds follow separate EU rules.