What is Article 75 of the Solvency II Directive?
Asked by: Prof. Anita Donnelly Jr. | Last update: May 12, 2025Score: 4.1/5 (69 votes)
Article 75Valuation of assets and liabilities (b)liabilities shall be valued at the amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm's length transaction.
What is Solvency II in simple terms?
Solvency II is the prudential regime for insurance and reinsurance undertakings in the EU. It has entered into force in January 2016. Solvency II sets out requirements applicable to insurance and reinsurance companies in the EU with the aim to ensure the adequate protection of policyholders and beneficiaries.
What policies are required under Solvency II?
The Solvency II framework sets out strengthened requirements around capital, governance and risk management in all EU authorised (re)insurance undertakings. Solvency II also introduces increased regulatory reporting requirements and public disclosure requirements.
What are the three pillars of solvency 2?
Solvency II is a risk-based capital regime, similar in concept to Basel II, based on three "pillars". Pillar 1 is a market consistent calculation of insurance liabilities and risk-based calculation of capital. Pillar 2 is a supervisory review process. Pillar 3 imposes reporting and transparency requirements.
What are large risks Solvency II Directive?
'Large risks' as defined in the Solvency II Directive include: marine, aviation, transport classes and contracts with commercial policyholder of certain size (more than 250 employees, with turnover of more than €12.8m or balance sheet over €6.2m).
Solvency II Directive
What is Article 75 of Directive 2009 138 EC?
Article 75Valuation of assets and liabilities
(b)liabilities shall be valued at the amount for which they could be transferred, or settled, between knowledgeable willing parties in an arm's length transaction.
What are the 4 key functions of Solvency II?
Enhancing the governance system of insurers (2) is one of the major goals of Solvency II (SII). The four key functions (risk management, actuarial, compliance and internal audit) as required under the SII regulation are an essential part of the system of governance.
What is a good Solvency II ratio?
Since the introduction of Solvency II, insurance companies are required to hold eligible own funds at least equal to their SCR at all times in order to avoid supervisory intervention, i.e. the SCR coverage ratio, defined as eligible own funds divided by SCR, is required to be at least 100%.
What is the discount rate for Solvency II?
For Solvency II, it is a fixed rate of 6% per annum. The product of the cost of capital rate and the capital requirement at each future projection point is then discounted, using risk-free discount rates, to give the overall risk margin.
What is the minimum capital requirement for Solvency II?
Without prejudice to the requirements on the absolute floor in 3.2, the MCR must neither fall below 25% nor exceed 45% of the firm's SCR, calculated in accordance with SCR Rules, and including any capital add-on which has been imposed.
What is the scope of Solvency II directive?
Solvency II sets out regulatory requirements for insurance firms and groups, covering financial resources, governance and accountability, risk assessment and management, supervision, reporting and public disclosure.
Who uses Solvency II?
Solvency II will apply to almost all insurers and reinsurance undertakings licensed in the EU.
What is the risk adjustment for Solvency II?
Under Solvency II, the risk margin covers the non-hedgeable risks, commonly interpreted as all non-financial risks. The confidence level for the required capital is set at the 99.5th percentile. The cost of capital is set at 6%, and the risk free rate is set by EIOPA.
What is solvency in layman terms?
Solvency is the ability of a company to meet its long-term debts and other financial obligations. Solvency is one measure of a company's financial health, since it demonstrates a company's ability to manage operations into the foreseeable future.
How do you calculate Solvency II?
Solvency II requires that the SCR is calculated at a “value-at-risk” that is subject to a 99.5% confidence level. In other words, the SCR should allow the insurer to be able to withstand, without its entire depletion, all but the most extreme risks that occur less than once every 200 years.
What is the best estimate liability in Solvency 2?
Figure 1 illustrates the Solvency II balance sheet at the valuation date (Time 0) and one year forward (Time 1). Best estiMate liaBility The Best Estimate Liability is the unbiased estimate of the present value of expected future cash flows.
What is the contract boundary for Solvency II?
The contract boundary is defined as the point when the company can change the premium to fully reflect the risk (as per Solvency II); or. As per the core reading, the premiums for coverage up to date when the risks are assessed does not take into account the risks that relate to periods after the assessment date.
How do you calculate solvency rate?
To calculate the ratio, divide a company's after-tax net income – and add back depreciation – by the sum of its liabilities (short-term and long-term). A high solvency ratio shows that a company can remain financially stable in the long term.
What is the cost of capital rate for Solvency II?
In this briefing note we also include a comparison to the Solvency II reforms proposed by the Prudential Regulation Authority (PRA) in the UK. In the revised framework for the risk margin, the cost of capital parameter has been set at 4.75% (reduced from the current 6%).
What is the minimum capital requirement?
The minimum capital requirements are composed of three fundamental elements: a definition of regulatory capital, risk weighted assets and the minimum ratio of capital to risk weighted assets.
What does equity ratio tell you?
The equity ratio is a financial metric that measures the amount of leverage used by a company. It uses investments in assets and the amount of equity to determine how well a company manages its debts and funds its asset requirements.
How does Solvency II affect the insurance industry?
The Solvency II proposals offer considerably more focus on risk than is found under Solvency I. Solvency II also provides incentives to manage risk through the use of diversification benefits, risk mitigation techniques and the use of partial and full internal models.
What is the Solvency II Directive proposal?
On 22 September 2021, the European Commission tabled a proposal for a directive that would amend Solvency II in essentially three ways: i) lowering regulatory obligations on small and low-risk profile insurance companies, ii) taking into account long-term and climate change risks, and iii) enhancing group-level and ...
What is the difference between solvency and liquidity?
Liquidity refers to both an enterprise's ability to pay short-term bills and debts and a company's capability to sell assets quickly to raise cash. Solvency refers to a company's ability to meet long-term debts and continue operating into the future.
What is the risk margin Solvency II?
The risk margin is part of the technical provisions under Solvency II. The technical provisions are defined as the amount required to be paid to transfer the business to another undertaking, in order to ensure that they meet the Solvency II requirement for market consistency.