Solvency Capital Requirement (SCR)
The capital an insurer must hold under Solvency II to absorb a one-in-200-year shock.
The SCR, or Solvency Capital Requirement, is the Pillar 1 capital requirement of Solvency II. Directive 2009/138/EC, Article 101: the SCR is calibrated to the Value-at-Risk of basic own funds at 99.5% over one year, meaning the shock the insurer should see exceeded only once in two hundred years. It is the amount of eligible own funds a carrier must hold against all its quantifiable risks: life and non-life underwriting, market, counterparty default and operational. Under the standard formula the mechanics read SCR = BSCR + operational SCR + adjustment, with BSCR = √(Σ Corr(i,j) × SCR(i) × SCR(j)). The modules are combined through correlation matrices, and diversification brings the total below the sum of the standalone charges; under the standard formula, operational risk is then added on top with no diversification credit. The adjustment captures the loss-absorbing capacity of technical provisions and deferred taxes. The figure comes either from the standard formula set out in the rules or from a full or partial internal model, which the supervisor has to approve (Article 112). Eligible own funds divided by the SCR gives the solvency ratio the whole market quotes. Below the SCR, the insurer files a recovery plan and normally has six months to get back above it (Article 138). The floor is the MCR, set between 25% and 45% of the SCR, and a breach of it opens the way to withdrawal of authorization. The two thresholds get mixed up. A breach of the SCR opens a conversation with the supervisor, a breach of the MCR opens a procedure. The number is computed under Pillar 1 and disclosed under Pillar 3, in the quantitative reporting templates filed with the supervisor and in the public SFCR; filings go through the EIOPA XBRL taxonomy and its validation rules before they are accepted. Cyber has no module of its own in the standard formula. It runs through non-life premium and reserve risk, which does a poor job of capturing the accumulation from a systemic event such as an outage at a major cloud provider, and the ORSA is where that gap has to be closed.
Textbook case: a specialist cyber insurer calculates its SCR on the Solvency II standard formula and comes out 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 (the ACPR in France) notes that the standard formula probably underestimates the cyber accumulation risk and asks it to document, in its ORSA, a scenario in which a single cloud outage hits 30 percent of its portfolio at once.
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