Solvency Capital Requirement

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Revenue Cap Regulation

    A form of economic regulation generally applied to utility companies. ...
  2. Price Cap Regulation

    A form of economic regulation generally specific to the utility ...
  3. Rate Of Return Regulation

    A form of price setting regulation where governments determine ...
  4. Revenue Regulation Fund

    The Revenue Regulation Fund is a sovereign wealth fund for the ...
  5. Regulation X

    A rule issued by the Board of Governors of the Federal Reserve ...
  6. Regulation W

    A Federal Reserve regulation that established terms for transactions ...
Related Articles
  1. Taxes

    Changes In Tax Legislation And Regulation

    Keeping on top of these amendments can help you avoid penalties and take advantage of benefits.
  2. Economics

    A Primer On Reserve Currencies

    For nearly a century, the U.S. dollar has served as the world's premier reserve currency, but the future is uncertain.
  3. Economics

    The SEC: A Brief History Of Regulation

    The SEC has continued to make the market a safer place and to learn from and adapt to new scandals and crises.
  4. Personal Finance

    Understanding The Basel III International Regulations

    The Basel III regulations mark a drastic reform in international banking. But how do they impact the future's investment landscape?
  5. Personal Finance

    How The Federal Reserve Was Formed

    Find out how this institution has stabilized the U.S. economy during economic downturn.
  6. Economics

    When The Federal Reserve Intervenes (And Why)

    The Federal Reserve doesn't interfere with the economy every time it flounders. Find out more here.
  7. Retirement

    Money Market Mayhem: The Reserve Fund Meltdown

    This event serves as a stark reminder to investors about understanding their portfolios.
  8. Options & Futures

    Principal-Protected Investments: Risks, Fees And Regulations

    Discover if these instruments hit the right note for you.
  9. Insurance

    Basel II Accord To Guard Against Financial Shocks

    Problems with the original accord became evident during the subprime crisis in 2007.
  10. Personal Finance

    How Basel 1 Affected Banks

    This 1988 agreement sought to decrease the potential for bankruptcy among major international banks.

You May Also Like

Hot Definitions
  1. Loan-To-Value Ratio - LTV Ratio

    A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage.
  2. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  3. Asset Class

    A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same ...
  4. Fiat Money

    Currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat ...
  5. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  6. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
Trading Center