The regulatory capital an insurer must hold under Solvency II to absorb a once-in-200-years shock.
The Solvency Capital Requirement is the solvency capital requirement at the heart of the European prudential regime Solvency II. It corresponds to the amount of own funds an insurer must hold to be able to absorb exceptional losses and meet its commitments with a probability of 99.5 percent over a one-year horizon, which conceptually amounts to surviving a shock whose severity would be exceeded only once every two hundred years. The SCR covers all of the insurer's quantifiable risks, underwriting, market, credit and operational risk, aggregated taking their correlations into account, which produces a diversification effect that reduces total capital relative to the sum of risks taken in isolation. It may be calculated using a standard formula provided by the regulation or an internal model specific to the firm, subject to supervisory approval. If eligible own funds fall below the SCR, the supervisor intervenes in graduated stages. The SCR is complemented by a lower floor, the Minimum Capital Requirement, whose breach triggers the most severe measures. The calibration of the SCR for emerging risks such as cyber remains a matter of debate, since the standard formula poorly captures their accumulation potential.
A specialist cyber insurer calculates its SCR using the Solvency II standard formula and arrives at 320 million euros, of which 180 million is attributable to non-life underwriting risk and 90 million to operational risk. It holds 420 million of eligible own funds, a coverage ratio of 131 percent. Its supervisor notes that the standard formula probably underestimates the cyber accumulation risk and asks it to document, in its ORSA, a scenario of simultaneous cloud outage affecting 30 percent of its portfolio.
SCR, capital de solvabilité requis, exigence de capital