Risk-based adequacy of own funds forms the core of Solvency II. A three-pillar approach is pursued here:

Pillar I

The own funds requirements, the rules for calculating the technical provisions and the review of the calculation approaches are set out as part of Pillar I. In terms of the capital requirements, a distinction is made between minimum capital and solvency capital. The minimum capital represents the absolute floor. The Minimum Capital Requirement (MCR) is the level of own funds below which the policyholders’ interests are at serious risk if the undertaking were to continue its business activities. It represents the final supervisory intervention threshold before the undertaking’s authorisation is withdrawn. The solvency capital is calculated using either a standard formula with a modular structure or an internal model. The Solvency Capital Requirement (SCR) has to be covered by eligible own funds of the same amount which enable insurers to absorb high levels of unexpected losses and give reasonable assurance to policyholders and beneficiaries that payments will be made as they fall due.

Pillar II

Pillar II of Solvency II sets out the principles and methods of supervision on the one hand and the qualitative requirements for engaging in insurance activities on the other. In terms of the supervisory rules, special attention is paid to the Supervisory Review Process used by the supervisory authorities to review and assess compliance with the quantitative and qualitative requirements. Pillar II also deals with the individual aspects of governance, including in particular, the fit and proper requirements, risk management, the own risk and solvency assessment (ORSA), internal controls, the internal audit function, the actuarial function and the framework conditions for outsourcing.

Pillar III

Pillar III deals with market discipline, transparency and disclosure obligations along with reporting to the supervisory authorities.

The essential technical information underlying these calculations is set out uniformly across the EU by the European Insurance and Occupational Pensions Authority (EIOPA).

Both primary insurers and reinsurers fall within the scope of the Directive, irrespective of their legal form. Institutions for occupational retirement provision, death benefit funds and small insurers are excluded from its scope. An initial indication for classifying an insurer as smaller is the business volume (annual gross written premium income posted of lower than five million euros or gross technical provisions lower than 25 million euros). Further information on the exceptions to the scope of Solvency II can be found in Articles 4 to 12 of the Solvency II Directive.