Tiering of own funds
The ranking of an insurer's resources by their real capacity to absorb a loss, with limits preventing the capital requirement from being met with weak items.
Delegated Regulation (EU) 2015/35 of October 10, 2014, which supplements Solvency II, sorts own funds items into three tiers and caps what each can cover. Two criteria drive the ranking: the permanence of the resource, and its ability to absorb losses on a going-concern basis, before any winding-up. Tier 1 holds paid-up share capital and the reconciliation reserve, tier 2 long-dated subordinated debt, tier 3 weaker items such as net deferred tax assets. The eligibility limits in Article 82 carry more weight than the ranking: at least half of the SCR met with tier 1, less than 15% with tier 3, and a stricter rule still for the MCR. Without those caps, the ratio could be built from the mix of resources alone, and two companies could post the same figure with unrelated capacity to take a shock. In practice an analyst reads the tier breakdown before the ratio, and the deferred tax line first.
Delegated Regulation (EU) 2015/35 of October 10, 2014, supplementing the Solvency II Directive, sets out the classification of own funds items and the eligibility limits applicable to covering the solvency capital requirement and the minimum capital requirement.
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