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. Price Cap Regulation

    A form of economic regulation generally specific to the utility ...
  2. Revenue Cap Regulation

    A form of economic regulation generally applied to utility companies. ...
  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. A Primer On Reserve Currencies
    Economics

    A Primer On Reserve Currencies

  2. The SEC: A Brief History Of Regulation
    Economics

    The SEC: A Brief History Of Regulation

  3. Understanding The Basel III International ...
    Personal Finance

    Understanding The Basel III International ...

  4. How The Federal Reserve Was Formed
    Personal Finance

    How The Federal Reserve Was Formed

comments powered by Disqus
Hot Definitions
  1. Market Segmentation

    A marketing term referring to the aggregating of prospective buyers into groups (segments) that have common needs and will ...
  2. Effective Annual Interest Rate

    An investment's annual rate of interest when compounding occurs more often than once a year. Calculated as the following: ...
  3. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  4. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  5. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  6. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
Trading Center