Insurance promises can last for decades. Regulators therefore need a framework that asks not only whether an insurer is profitable today, but whether it has enough financial resources, governance and risk controls to withstand adverse events and continue meeting obligations to policyholders.
EIOPA describes Solvency II as the EU prudential regime for insurers and reinsurers. It entered into force in January 2016 and uses a risk-based approach to assess overall solvency through both quantitative and qualitative measures.
The three pillars of Solvency II
Pillar I: quantitative requirements
Pillar I covers valuation of assets and liabilities, technical provisions, own funds and capital requirements. The framework uses market-consistent principles and requires insurers to measure a broad range of underwriting, market, credit and operational risks.
Pillar II: governance and risk management
Pillar II addresses the quality of the insurer’s governance, internal controls and risk-management system. A central element is the Own Risk and Solvency Assessment (ORSA), in which the insurer evaluates its own risk profile, solvency needs and ability to comply with capital requirements on an ongoing basis.
Pillar III: reporting and disclosure
Pillar III requires reporting to supervisors and public disclosure. The Solvency and Financial Condition Report (SFCR) gives market participants and policyholders a window into an insurer’s business, risk profile, valuation methods, capital management and solvency position.
| Pillar | Main focus | Examples |
|---|---|---|
| I | Quantitative financial requirements | Technical provisions, own funds, SCR, MCR |
| II | Governance and risk management | ORSA, internal controls, supervisory review |
| III | Reporting and disclosure | Supervisory reporting and SFCR |
What is the Solvency Capital Requirement (SCR)?
The SCR is the central risk-based capital requirement. Under the Solvency II Directive, it is calibrated to reflect a 99.5% Value-at-Risk confidence level over a one-year period. In simplified terms, it is designed to provide a high level of confidence that the insurer can absorb unexpected losses over that horizon.
Companies can calculate the SCR using the standard formula set by the framework or, with supervisory approval, a full or partial internal model that better reflects their own risk profile.
What is the Minimum Capital Requirement (MCR)?
The MCR is a lower capital threshold with a more severe supervisory meaning. EIOPA’s rulebook describes it as the level below which policyholders and beneficiaries would be exposed to an unacceptable level of risk if the insurer continued operating. The relationship between SCR and MCR creates graduated supervisory intervention rather than a single pass/fail solvency number.
Why diversification matters
Insurers rarely carry only one risk. A diversified portfolio can reduce the chance that every exposure produces a large loss at the same time. Solvency II recognizes diversification within its capital calculations, but it also captures concentration, counterparty and catastrophe risks that can undermine the benefit.
What Solvency II means for policyholders and the market
Policyholders do not calculate SCRs, but the regime matters because capital, governance and reporting rules affect insurer resilience. For investors and industry professionals, Solvency II also creates a common language for comparing risk, capital and solvency across EU insurance groups.
Five terms to remember
- Technical provisions: The value assigned to future insurance obligations under the framework.
- Own funds: Financial resources eligible to cover regulatory capital requirements.
- SCR: The principal risk-based capital requirement.
- MCR: A lower intervention threshold with stronger regulatory consequences.
- ORSA: The insurer’s forward-looking assessment of its own risks and solvency needs.
Frequently asked questions
Is Solvency II only about capital?
No. Capital is Pillar I, but governance, risk management, supervision, reporting and public disclosure are also core parts of the regime.
Who supervises Solvency II?
National competent authorities supervise insurers in their jurisdictions, while EIOPA supports supervisory convergence and the EU-level framework.
Can insurers use their own capital model?
Yes, subject to supervisory approval and the detailed requirements for internal models.
Sources & further reading
Reviewed in September 2026. This explainer is educational; regulatory requirements evolve and should be checked against current EU law and supervisory guidance.
