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.
Not all own funds items are equal, and the prudential regime ranks them in tiers on two criteria, the permanence of the resource and its ability to absorb losses while the undertaking is still a going concern rather than only in winding-up. The first tier gathers paid-up share capital and the reconciliation reserve, the second long-dated subordinated instruments, the third weaker items such as certain deferred tax assets. Quantitative limits sit on top of that ranking and are the heart of the arrangement: a majority share of the solvency capital requirement must be met with tier one items, and tier three items may cover only a small fraction. Without those limits a solvency ratio would be manipulable through the composition of resources alone, with two undertakings showing the same figure while having unrelated capacity to withstand stress. Reading a ratio without reading its composition is therefore a common analytical error, and the share of deferred tax is the first thing to check.
Delegated Regulation (EU) 2015/35 of 10 October 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.
tiering, tier 1 tier 2 tier 3, classement des fonds propres, own funds tiering