Solvency Capital Requirement

DEFINITION of 'Solvency Capital Requirement'

The amount of  funds that insurance and reinsurance undertakings are required to hold in the European Union. Solvency capital requirement is a formula-based figure calibrated to ensure that all quantifiable risks are taken into account, including non-life underwriting, life underwriting, health underwriting, market, credit, operational and counterparty risks. The solvency capital requirement covers existing business as well as new business expected over the course of 12 months, and is required to be recalculated at least once per year.

BREAKING DOWN 'Solvency Capital Requirement'

Solvency capital requirements are part of the Solvency II Directive issued by the European Union (EU) in 2009, which replaces 13 existing EU directives. The directive aims to coordinate laws and regulations of the 27 EU members (including the United Kingdom) as they relate to the insurance industry. If the supervisory authorities determine that the requirement does not adequately reflect the risk associated with a particular type insurance, it can adjust the capital requirement higher.

The solvency capital requirement is set at a level to ensure that insurers and reinsurers can meet their obligations to policy holders and beneficiaries over the following 12 months with a 99.5% probability, which limits the chance of falling into financial ruin to less than once in 200 cases. The formula takes a modular approach, meaning that individual exposure to each risk category is assessed and then aggregated together.

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