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.

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.



comments powered by Disqus
Hot Definitions
  1. Cash and Carry Transaction

    A type of transaction in the futures market in which the cash or spot price of a commodity is below the futures contract price. Cash and carry transactions are considered arbitrage transactions.
  2. Amplitude

    The difference in price from the midpoint of a trough to the midpoint of a peak of a security. Amplitude is positive when calculating a bullish retracement (when calculating from trough to peak) and negative when calculating a bearish retracement (when calculating from peak to trough).
  3. Ascending Triangle

    A bullish chart pattern used in technical analysis that is easily recognizable by the distinct shape created by two trendlines. In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs.
  4. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  5. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  6. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
Trading Center