Solvency II  is the well-known harmonised European framework for insurance companies that has became applicable from the beginning of 2016. Subsequently, all the insurers have adjusted their internal models and processes for reporting to the regulator according to the recommended structures. We state some crucial financial parameters discussed in Solvency II regime in this piece. 


Solvency Capital Requirement (SCR)

Solvency capital requirement (SCR) is the capital demanded by the national supervisor (within the EU) to ensure that insurance companies can meet their liabilities over the next 12 months with a probability of at least 99.5%. Currently, calculating the Solvency capital requirement is one of the main tasks of the risk control department in the insurance companies.


Minimum Capital Requirement (MCR)

A minimum capital requirement (MCR) represents the threshold at where the regulator will step in and assume control of the business. It is usually determined as a value in between 25% and 45% of the SCR. 


Best Estimate

Best estimate of the liabilities is the probability-weighted mean of the present value of the future cash flows of the obligations of the company, based on all observable trends in the market hitherto.


Value at Risk, the Target Risk Measure under Solvency II

Suppose the random variable L represents the loss over a one-year horizon, where a negative value of L signifies a profit. In this case, \( Pr⁡(L\,≤\,0) \) indicates the probability of a successful hedging strategy. Then the mathematical definition of value at risk (VaR) for a given confidence level \( \alpha \in (0,1) \) is as follows:

$$VaR^\alpha=\inf \{ x \in R,\,\, Pr⁡( L \leq x) > 1-\alpha \} .$$

The SCR is based on a Value-at-Risk measure to a confidence level of 99.5% over a 1-year time horizon.