Solvency capital requirements are part of the Solvency II Insurance Directive issued by the European Union (EU) in 2009. The directive aims to coordinate laws and regulations of the 28 EU members 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 of insurance, it can adjust the capital requirement higher.
Solvency II bring a market-consistent and risk-based approach which wasn’t always present in the prior regulatory scheme.
In calculating its solvency and capital requirements insurers are required to include both existing business and any new business expected to be written over the following 12 months.
Solvency II imposes a solvency capital requirement (“SCR”) and a lower, minimum capital requirement (“MCR”) on insurance undertakings.