Solvency II

Economic Balance Sheet

A Solvency II balance sheet is similar to the traditional balance sheets. The main concept is that it is valued at fair value. The criteria for recognition is the IFRS.

Own Funds

Own Funds refers to the company’s capital. This is for instance share capital and reflects the amount available to meet the Solvency Capital Requirement calculated under the SCR section.

Calculations

Solvency Capital Requirement (SCR)

The SCR is a fairly complicated calculation. Broadly it has some five modules which are summed together then Operational Risk is added and e.g. Tax deducted thrugh correlation matrixes. The result is the SCR. The five modules covers risks around Life, Non-Life, Health, Market and CounterParty Default.

Minimum Capital Requirement (MCR)

The MCR has the SCR as an input. The other inputs are premiums and reserves per line of business (on a SII segmentation).

MCR is subject to a SCR corridor of 25%-45% of the SCR.

Then the last addition to the formula is the absolute floor. An amount set by the regulator which is the company’s lowest possible MCR.

Read more here.

Liabilities

Best Estimate Liability

This is the part of the technical provisions that form the best estimate. This may includes ENIDs which are described here.

Risk Margin

Begin with calculating the best estimate as described earlier. Then the risk margin is calculated as an add-on. Together they form the full technical provisions.

The miniature world of Solvency II regulation

The SII Directive
2009/138

Commission Delegated Regulation - 2015/35

Commission Implementing Regulation - 2015/2450

RFR

Lines of Business under Solvency II (Annex I, 2015/35)

Medical Expense Insurance
Medical expense insurance obligations where the underlying business is not pursued on a similar technical basis to that of life insurance, other than obligations included in the Workers’ compensation.

Income Protection Insurance
Income protection insurance obligations where the underlying business is not pursued on a similar technical basis to that of life insurance, other than obligations included in the Workers’ compensation.

Workers’ Compensation Insurance
Health insurance obligations which relate to accidents at work, industrial injury and occupational diseases and where the underlying business is not pursued on a similar technical basis to that of life insurance.

Motor Vehicle Liability Insurance
Insurance obligations which cover all liabilities arising out of the use of motor vehicles operating on land (including carrier’s liability). 

Other Motor Insurance
Insurance obligations which cover all damage to or loss of land vehicles (including railway rolling stock).

Marine, Aviation and Transport Insurance
Insurance obligations which cover all damage or loss to sea, lake, river and canal vessels, aircraft, and damage to or loss of goods in transit or baggage irrespective of the form of transport. Insurance obligations which cover liabilities arising out of the use of aircraft, ships, vessels or boats on the sea, lakes, rivers or canals (including carrier’s liability).

Fire and Other Damage to Property Insurance
Insurance obligations which cover all damage to or loss of property other than those included in the lines of business motor and marine due to fire, explosion, natural forces including storm, hail or frost, nuclear energy, land subsidence and any event such as theft.

General Liability Insurance
Insurance obligations which cover all liabilities other than those in the lines of business of motor and marine.

Credit and Suretyship Insurance
Insurance obligations which cover insolvency, export credit, instalment credit, mortgages, agricultural credit and direct and indirect suretyship. 

Legal Expenses Insurance
Insurance obligations which cover legal expenses and cost of litigation. 

Assistance
Insurance obligations which cover assistance for persons who get into difficulties while travelling, while away from home or while away from their habitual residence.

Miscellaneous Financial Loss
Insurance obligations which cover employment risk, insufficiency of income, bad weather, loss of benefit, continuing general expenses, unforeseen trading expenses, loss of market value, loss of rent or revenue, indirect trading losses other than those mentioned above, other financial loss (non-trading) as well as any other risk of non-life insurance not covered by the above 11 lines of business. 

Reporting

Assumptions

  • There are many variations of this but justification is important.
  • Sensitivity testing may be needed.

Methods

  • Explain the methods used.
  • Discuss other options for methods.

FAQ

Most frequent questions and answers

To run an insurance business capital is needed. The reason for a capital requirement is mainly consumer protection. Under Solvency II there are two levels, the SCR and the MCR.

An insurance company’s own capital is called Own Funds under Solvency II. Much like equity. In many cases in consist mainly of the company’s share capital.

This is the amount needed to cover for future claims and expenses. This is calculated on the basis that the business isn’t adding new business.

The idea of reinsurance is risk mitigation. This is insurance for insurance companies. There clients are other insurance companies.

This is an add-on to the technical provisions reflecting the cost to hold the reserves and run the business.

This is like Financial Statement of Solvency II. It covers the numbers for the company and also describes how the company assess its risks, amongst others. It is a public document.

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