Solvency Capital Requirements (SCR) are a key component of the Solvency II regulatory framework for insurance companies in the European Union. They represent the amount of funds that insurers must hold to ensure they can meet their obligations over the next 12 months with a 99.5% confidence level. This requirement is designed to protect policyholders by making sure that even under unexpected adverse scenarios—such as market crashes, natural catastrophes, or insurance-specific risks like high claim volumes—insurers remain financially stable.
The SCR is calculated using either a standard formula provided by the regulatory authorities or an internal model developed by the insurer, subject to regulatory approval. The standard formula takes into account various types of risks including underwriting risk, market risk, credit risk, and operational risk. Each of these risk categories is quantified, aggregated, and then adjusted for diversification effects and loss-absorbing capacity to arrive at the total SCR.
Meeting the SCR means that an insurer is well-capitalized to handle potential shocks. Falling below this threshold triggers regulatory intervention and could lead to restrictions on business operations or even supervisory action to restore the capital position. The SCR is therefore a central measure of an insurer’s solvency and plays a critical role in risk management and financial planning within the insurance industry.