Solvency ratio (SCR coverage ratio)

On January 1, 2016, Solvency II comes into force, and in spring 2017 the first public solvency reports give, for fiscal year 2016, the figure analysts look for before any other: the solvency ratio. It is eligible own funds divided by the SCR. At 100%, the insurer holds exactly the capital the 99.5% one-year calibration asks for. Below that, Article 138 of Directive 2009/138/EC opens a recovery procedure: a plan to the supervisor within two months, a return to the required level within six, with the period extendable when markets are in exceptional circumstances. The MCR ratio exists too, and it is the one that threatens the license, but nobody steers on it. Listed groups in practice set a management range well above 100%, often announced between 150% and 200%, and tie their dividend policy to what is left after a shock. The figure moves with rates, credit spreads, equities and mortality, and the reports give its sensitivity to each. It is always read with its context: standard formula or internal model, volatility adjustment, transitional measure on technical provisions, subordinated debt counted in Tier 2. Two insurers at 190% are not level if one gets there with a transitional measure and the other without. The reports have to quantify the effect of those aids, and that is the line to check before comparing.