In both Solvency II and the emerging Solvency UK regimes, the Minimum Capital Requirement (MCR) and the Solvency Capital Requirement (SCR) serve as key quantitative thresholds for capital adequacy, but they differ significantly in purpose, calculation, and regulatory consequence. The SCR represents the level of capital that an insurer needs to hold in order to ensure that it can meet its obligations over a one-year period with a confidence level of 99.5%. It is a risk-sensitive measure designed to reflect the full spectrum of an insurer’s underwriting, market, credit, operational, and counterparty risks. The SCR can be calculated using either the Standard Formula provided by the regulator or an Internal Model, subject to regulatory approval. This capital level is intended to act as a buffer against unexpected losses and to ensure that the insurer remains solvent even under stressed conditions.
In contrast, the MCR is a lower bound on capital, set to ensure a minimum level of policyholder protection. It represents the point below which the insurer’s financial resources are considered insufficient to continue operating without immediate regulatory intervention. The MCR is calculated using a simpler and more linear formula, primarily based on basic volume measures such as premiums written and technical provisions. It is not risk-sensitive in the same way as the SCR, but it provides a hard floor to the solvency regime. Breach of the SCR triggers increased supervisory engagement and the requirement to submit a recovery plan, whereas breach of the MCR typically requires immediate action and may lead to withdrawal of authorisation or initiation of winding-up procedures.
The main difference, therefore, lies in the function each requirement serves within the prudential framework. The SCR is a target level, aiming to ensure that insurers can withstand significant but plausible losses. It is a dynamic, risk-based measure aligned with an economic capital approach, providing flexibility for firms to develop models that reflect their individual risk profiles. The MCR, by contrast, is a backstop designed to prevent insurers from falling below a basic threshold that would put policyholders at immediate risk. It is deliberately calibrated to be less sensitive to volatility, offering a consistent and enforceable trigger for regulatory action.
Retained Under Solvency UK?
Under Solvency UK, these concepts are retained but adapted to fit the UK’s post-Brexit policy aims. While the core definitions of SCR and MCR remain consistent with Solvency II, the PRA has introduced refinements through recent policy statements to improve proportionality and responsiveness. For example, smaller and less complex insurers may benefit from simplified calculation methodologies or reduced reporting burdens, while the overarching prudential intent of the capital requirements remains unchanged. The distinction between SCR and MCR continues to underpin the regulatory ladder of intervention, providing structured thresholds for supervisory oversight based on the severity of capital shortfall.
Practical Approach
In practice, this two-tiered capital framework supports early intervention and structured resolution planning. It allows regulators to monitor solvency levels with granularity, ensuring that firms take pre-emptive action when approaching capital stress. The SCR provides breathing room and a structured opportunity to restore compliance, while the MCR represents the line beyond which continued operation is no longer permissible. Together, these thresholds contribute to a resilient and orderly insurance sector, reinforcing confidence in the financial strength of firms operating under both Solvency II and Solvency UK.