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Solvency II: understanding capital requirements, ORSA and reporting

Solvency II combines quantitative capital requirements with governance and reporting. This overview explains SCR, MCR and the role of ORSA in managing an insurer.

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Establish the insurance framework

Solvency II is the EU’s risk-based prudential regime for insurance and reinsurance undertakings. Germany’s Insurance Supervision Act, the VAG, provides the principal national framework. Applicability depends on the undertaking and statutory exceptions. A banking MaRisk or ICAAP concept therefore cannot simply be transferred to an insurer.

Overview

Connect the three pillars

The pillars assess the same insurer from different perspectives. Capital calculations need to be consistent with its risk profile and published information.

PillarSubjectTypical work products
1: Quantitative requirementsValuation, own funds and capital requirementsSolvency balance sheet, SCR, MCR
2: Governance and riskOrganisation, controls and own risk assessmentPolicies, control evidence, ORSA
3: Reporting and disclosureInformation for supervisors and the publicSupervisory reports and SFCR
Overview

SCR and MCR answer different questions

The Solvency Capital Requirement (SCR) addresses quantifiable risks and is calibrated to a 99.5% confidence level over one year. It must be covered by eligible own funds. The Minimum Capital Requirement (MCR) represents a lower intervention threshold below which continued business would expose policyholders and beneficiaries to unacceptable risk. It requires eligible basic own funds. SCR and MCR coverage are therefore distinct measures.

Overview

Use ORSA as a recurring management process

ORSA covers overall solvency needs, continuous compliance with capital and technical-provision requirements, and material differences between the risk profile and calculation assumptions. It must connect with business strategy and be repeated without delay following material changes in risk. VAG section 27 requires the supervisor to be informed within 14 days of completion. Internally, keep the data version, scenarios, management decisions and follow-up actions traceable.

Overview

Compare ORSA with ICAAP

Both connect an organisation’s own assessment of risk with planning and management decisions. Their legal bases and supervisory systems differ. In particular, ORSA does not itself impose an additional statutory capital requirement. ICAAP is also an internal assessment; supervisory capital decisions arise through the SREP.

QuestionORSAICAAP
SectorInsurers within the Solvency II frameworkBanks under the applicable supervisory framework
FocusOverall solvency needs, continuous requirements and model assumptionsInternal capital adequacy and risk coverage
Strategic connectionInsurance and risk strategy, future businessBusiness strategy, capital and risk planning
Supervisory contextPart of governance and risk managementInput to supervisory assessment through SREP
Additional capitalNo automatic capital requirement imposed by ORSANo automatic P2R amount derived from an ICAAP figure
Overview

Prepare reports from approved data versions

The SFCR is the public Solvency and Financial Condition Report. It differs from supervisory reporting and internal management reports. Shared data still require audience-specific approvals and distinct publication permissions. Each figure should have a clear source version and an accountable person who can explain differences from other reports.

Overview

Prepare for the 2027 review

EIOPA identifies 30 January 2027 as the application date for the rules changed by Directive (EU) 2025/2. Keep future and current requirements in separate change-register records. Useful preparation includes reviewing applicability, affected data and reporting content, and changes to policies and approvals. Existing risk management continues during the transition.

FAQ

Frequently asked questions

Is a high SCR coverage ratio sufficient on its own?

It is an important indicator. MCR coverage, the quality of own funds, governance, risk management and reporting also require attention.

Is ORSA simply ICAAP for insurers?

The approaches share features of internal risk assessment. Their legal bases, questions and supervisory consequences differ. An existing banking approach needs substantive reassessment.

Must the ORSA report be public?

ORSA is an internal and supervisory assessment. The public SFCR is a separate reporting instrument.

Sources & further reading

  1. EIOPA: Solvency II, drei Säulen und Review 2027eiopa.europa.eu
  2. VAG § 89: anrechnungsfähige Eigenmittelgesetze-im-internet.de
  3. VAG § 97: Solvabilitätskapitalanforderunggesetze-im-internet.de
  4. VAG § 122: Mindestkapitalanforderunggesetze-im-internet.de
  5. VAG § 27: ORSAgesetze-im-internet.de
  6. VAG § 40: Solvabilitäts- und Finanzberichtgesetze-im-internet.de
  7. Solvency-II-Richtlinie, Artikel 45 und 129eur-lex.europa.eu
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