# Solvency Ii > description: Solvency II framework — three pillars, SCR, MCR, ORSA. - Skill: `majiayu000/solvency-ii` (Agent Skill, multi-file: 2 files) - Install (CLI): `npx skillmds add majiayu000/solvency-ii` - Raw SKILL.md: https://api.skillmd.com/api/skills/majiayu000/solvency-ii/raw - Safety review: pending - Works with: Claude Code, Claude.ai, OpenAI Codex - Category: Coding & Dev Tools - Author: majiayu000 (https://skillmd.com/u/majiayu000) - Updated: 2026-09-09 - Page: https://skillmd.com/skills/majiayu000/solvency-ii --- # Solvency II name: solvency-ii description: Solvency II framework — three pillars, SCR, MCR, ORSA. ## When to Activate - Calculating Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR) - Understanding the three-pillar structure of Solvency II - Performing or reviewing an Own Risk and Solvency Assessment (ORSA) - Classifying and valuing insurance liabilities (best estimate + risk margin) - Assessing eligible own funds and tiering (Tier 1, 2, 3) - Evaluating risk modules under the standard formula - Comparing standard formula vs internal model approaches - Analyzing group solvency and intra-group transactions - Regulatory reporting (QRTs — Quantitative Reporting Templates) - Solvency and Financial Condition Report (SFCR) preparation ## Core Concepts ### Three-Pillar Structure **Pillar 1 — Quantitative Requirements:** - Valuation of assets and liabilities (market-consistent) - Technical provisions = Best Estimate Liabilities (BEL) + Risk Margin - Solvency Capital Requirement (SCR) — target capital - Minimum Capital Requirement (MCR) — absolute floor - Own funds classification and eligibility - Investment rules (prudent person principle) **Pillar 2 — Qualitative Requirements (Governance):** - System of governance (fit and proper, key functions) - Risk management system and policies - Own Risk and Solvency Assessment (ORSA) - Internal control system - Actuarial function requirements - Outsourcing governance - Supervisory review process **Pillar 3 — Reporting and Disclosure:** - Solvency and Financial Condition Report (SFCR) — public - Regular Supervisory Report (RSR) — to supervisor - Quantitative Reporting Templates (QRTs) — structured data - Annual and quarterly reporting cycles - Group reporting requirements ### Technical Provisions ``` Technical Provisions = Best Estimate Liabilities (BEL) + Risk Margin Best Estimate Liabilities: = Probability-weighted average of future cash flows = PV of expected future claim payments + expenses - future premiums Discounted at risk-free rate (EIOPA publishes term structures) Adjustments to risk-free rate: - Volatility Adjustment (VA): Correction for credit spread volatility - Matching Adjustment (MA): For portfolios of illiquid liabilities matched with assets - Transitional measures: Phased introduction for legacy portfolios Risk Margin: = Cost of capital required to run off the insurance liabilities = Cost-of-Capital rate (6%) x PV of future SCR over run-off period Represents the amount a third party would require above BEL to take over the liabilities ``` ### Solvency Capital Requirement (SCR) **Standard Formula — modular structure:** ``` SCR = BSCR + Adj + SCR_op BSCR (Basic SCR) — aggregated using correlation matrices: Market Default Life Health Non-Life Market risk 1.00 Counterparty def. 0.25 1.00 Life underwriting 0.25 0.25 1.00 Health UW 0.25 0.25 0.25 1.00 Non-life UW 0.25 0.50 0.00 0.00 1.00 BSCR = sqrt(Sum_ij Corr_ij x SCR_i x SCR_j) + SCR_intangibles Adj = Adjustment for loss-absorbing capacity of technical provisions and deferred taxes SCR_op = Operational risk capital charge ``` **SCR risk modules:** | Module | Sub-modules | Key Risk | |--------|------------|----------| | Market risk | Interest rate, equity, property, spread, concentration, currency | Asset value changes | | Counterparty default | Type 1 (reinsurance, derivatives), Type 2 (receivables) | Counterparty failure | | Life underwriting | Mortality, longevity, disability, lapse, expense, revision, catastrophe | Insurance risk (life) | | Health underwriting | SLT health, non-SLT health, catastrophe | Insurance risk (health) | | Non-life underwriting | Premium & reserve, lapse, catastrophe (natural, man-made) | Insurance risk (non-life) | | Operational risk | Based on premiums and technical provisions | Operational failures | **SCR calculation method:** ``` Each sub-module applies a prescribed stress: - Equity risk: 39% + symmetric adjustment (type 1) or 49% (type 2) instantaneous fall - Interest rate risk: Prescribed up/down shifts to yield curve - Spread risk: Instantaneous widening based on rating and duration - Property risk: 25% instantaneous fall - Longevity risk: 20% permanent decrease in mortality rates - Lapse risk: Max of mass lapse (40%), permanent increase (50%), permanent decrease (50%) - Non-life CAT: Scenario-based (natural catastrophe models by peril and region) SCR for each module = Change in net asset value (own funds) under the stress ``` ### Minimum Capital Requirement (MCR) ``` MCR = Max(MCR_linear, 25% x SCR) MCR = Min(MCR, 45% x SCR) MCR = Max(MCR, Absolute Floor) Absolute floors: Life: EUR 3.7M Non-life: EUR 2.5M Composite: EUR 3.7M Reinsurance: EUR 3.6M MCR_linear: Based on technical provisions and premiums written (simpler calculation than SCR — provides an absolute minimum) Breaching MCR triggers ultimate supervisory intervention (license withdrawal) Breaching SCR triggers recovery plan and supervisory escalation ``` ### Own Funds **Classification into tiers based on quality:** | Tier | Characteristics | Examples | SCR Coverage Limit | MCR Coverage Limit | |------|----------------|---------|-------------------|-------------------| | Tier 1 (unrestricted) | Permanent, fully loss-absorbing, subordinated | Paid-up ordinary share capital, retained earnings, reconciliation reserve | Unlimited | Unlimited (min 80% of MCR) | | Tier 1 (restricted) | Permanent, loss-absorbing, call after 5+ years | Perpetual subordinated instruments | Max 20% of Tier 1 | Max 20% of Tier 1 | | Tier 2 | Subordinated, minimum 10-year maturity | Dated subordinated debt, unpaid called-up capital | Max 50% of SCR | Max 20% of MCR | | Tier 3 | Subordinated, minimum 5-year maturity | Short-dated subordinated debt, net DTA | Max 15% of SCR | Not eligible | **Solvency ratio:** ``` Solvency Ratio = Eligible Own Funds / SCR x 100% Target: > 100% (absolute minimum) Comfortable: > 150-180% (most insurers target this range) Strong: > 200% Below 100%: Recovery plan required, supervisor intensifies oversight Below MCR: Finance scheme required, ultimate intervention possible ``` ### ORSA (Own Risk and Solvency Assessment) **Purpose:** Forward-looking self-assessment of the undertaking's overall solvency needs considering its specific risk profile, risk tolerance, and business strategy. **ORSA requirements:** 1. **Overall solvency needs:** Assessment of capital needs beyond the regulatory SCR, considering risks not fully captured by the standard formula 2. **Continuous compliance:** Forward-looking projection of SCR and own funds over the business planning horizon (typically 3-5 years) 3. **Deviation from standard formula assumptions:** Assessment of whether the standard formula SCR appropriately reflects the undertaking's risk profile **ORSA process:** ``` 1. Risk identification and assessment - Quantifiable risks (market, underwriting, credit, operational) - Non-quantifiable risks (strategic, reputational, regulatory) - Emerging risks 2. Stress testing and scenario analysis - Regulatory stress scenarios - Reverse stress tests (what breaks the business?) - Company-specific scenarios (key risk concentrations) 3. Capital projection - Base case: SCR and own funds over planning period - Adverse scenario: Impact on solvency ratio - Management actions: Planned responses to solvency deterioration 4. Board sign-off - ORSA report presented to and approved by the board - Integration with business strategy and capital planning - Documented decision-making process ``` ### Standard Formula vs Internal Model | Feature | Standard Formula | Internal Model | |---------|-----------------|----------------| | Complexity | Prescribed calculations | Company-specific model | | Calibration | Regulatory parameters | Own data and assumptions | | Risk sensitivity | Moderate | High (reflects actual risk profile) | | Approval | Automatic | Requires supervisory approval (pre-application, documentation, validation) | | Diversification | Prescribed correlation matrices | Company-specific correlations | | Cost | Low | High (build, validation, ongoing maintenance) | | Typical users | Small-mid insurers | Large insurers, complex risk profiles | ## Methodology 1. **Valuation**: Mark assets to market; calculate BEL and risk margin for technical provisions 2. **Own funds determination**: Classify capital instruments into tiers; apply limits 3. **SCR calculation**: Apply standard formula stresses or run internal model; aggregate using correlation matrix 4. **MCR calculation**: Apply linear formula and corridor (25-45% of SCR) 5. **Solvency ratio**: Eligible own funds / SCR; assess against target and trigger levels 6. **ORSA**: Forward-looking solvency projection; stress testing; board reporting 7. **Reporting**: Prepare QRTs, SFCR, and RSR per regulatory timelines ## Templates ### Solvency Position Summary ``` === SOLVENCY II POSITION === Amount (EUR M) Own Funds: Tier 1 unrestricted __________ Tier 1 restricted __________ Tier 2 __________ Tier 3 __________ Total own funds __________ Eligible own funds (after limits) __________ SCR Components: Market risk __________ Counterparty default risk __________ Life underwriting risk __________ Health underwriting risk __________ Non-life underwriting risk __________ Diversification benefit (__________) BSCR __________ Operational risk __________ Adj (loss-absorbing capacity) (__________) SCR __________ MCR __________ Solvency Ratio (Own Funds / SCR): ____% MCR Coverage (Own Funds / MCR): ____% Status: [ ] Compliant [ ] Recovery Plan [ ] Finance Scheme ``` ### ORSA Solvency Projection ``` === FORWARD-LOOKING SOLVENCY PROJECTION === Year 0 Year 1 Year 2 Year 3 (Actual) (Projected) (Projected) (Projected) Own funds ________ ________ ________ ________ SCR ________ ________ ________ ________ Solvency ratio ____% ____% ____% ____% Stress scenario (equity -30%, spread +100bp): Own funds ________ ________ ________ ________ SCR ________ ________ ________ ________ Solvency ratio ____% ____% ____% ____% Management actions: Dividend restriction: Trigger at ____% solvency ratio De-risking: Trigger at ____% solvency ratio Capital raise: Trigger at ____% solvency ratio ``` ## Quality Gate - [ ] Technical provisions calculated as BEL + risk margin using EIOPA risk-free rate curves - [ ] Volatility adjustment or matching adjustment applied only where criteria are met - [ ] Own funds classified into correct tiers with eligibility limits applied - [ ] SCR modules correctly stressed using prescribed calibrations - [ ] Diversification benefit calculated using regulatory correlation matrices - [ ] Loss-absorbing capacity of deferred taxes substantiated with recoverability analysis - [ ] MCR calculated within the 25-45% SCR corridor and above absolute floor - [ ] ORSA covers forward-looking solvency projection under base and stress scenarios - [ ] Standard formula appropriateness assessed (ORSA requirement) - [ ] QRTs completed per regulatory templates and timelines - [ ] SFCR prepared for public disclosure with required content sections - [ ] Group solvency calculations include all subsidiaries and eliminate intra-group transactions