The European prudential supervisory framework for insurers and reinsurers, built on a risk-based approach and structured around three pillars.
Solvency II is the European prudential supervisory framework for insurance and reinsurance undertakings, which entered into force in January 2016 through transposition of European Directive 2009/138/EC. It rests on a three-pillar architecture that defines respectively the quantitative requirements, the qualitative governance requirements and the transparency obligations. The first pillar sets the two regulatory capital thresholds: the Minimum Capital Requirement (MCR), the floor below which the supervisory authority can withdraw authorization, and the Solvency Capital Requirement (SCR), the amount of own funds covering all significant risks at a confidence level of 99.5 percent over a one-year horizon. This SCR can be calculated using a standard formula or, for complex groups, through an internal model subject to validation. The second pillar imposes a governance system including key functions, notably the actuarial function, risk management, compliance and internal audit, as well as the ORSA, the own risk and solvency assessment process. The third pillar organizes prudential reporting to the supervisor (Regular Supervisory Report) and public transparency (SFCR, Solvency and Financial Condition Report). The central feature of the regime is its approach based on actual risks: unlike the Solvency I regime, which applied flat-rate ratios, Solvency II makes the capital requirement sensitive to each entity's actual profile, which incentivizes better management. The impact on cyber underwriting practices is significant, because the SCR must capture exposure to accumulation risks and catastrophe scenarios, which requires fine modeling of portfolio dependencies.
A cyber insurer whose portfolio is concentrated on clients using the same cloud provider will see its SCR increase significantly compared with a diversified portfolio, because the model will need to reflect the potential correlation between claims in the event of a failure by the common provider.
Solvency II, directive solvabilité, cadre prudentiel assurance