Minimum capital requirement (MCR)

Category: Capital management · Reviewed by Al Jabbar, Broker · Specialist Risks · Last reviewed

Minimum capital requirement (MCR)

The Minimum Capital Requirement (MCR) under Solvency II is a hard supervisory floor below which authorisation is withdrawn. It is calibrated to a Value at Risk at the 85% confidence level over one year — substantially less prudent than the SCR’s 99.5%, but designed as the point of no return for supervisory intervention.

Calculation

The MCR is a linear function of premium and technical provisions, calibrated by line of business, subject to floors and corridor constraints:

• Floor — 25% of the SCR.
• Cap — 45% of the SCR.
• Absolute minimum (AMCR) — varies by undertaking type (e.g. €2.5m for non-life insurers, €3.7m for life insurers, €3.6m for reinsurers under Article 129).

Coverage requirements

The MCR may only be covered by Tier 1 and Tier 2 basic own funds, with at least 80% Tier 1. Tier 3 capital cannot count toward the MCR.

Consequences of breach

If an insurer breaches the MCR:

• A short-term finance scheme must be submitted to the supervisor within 1 month.
• The scheme must restore the MCR within 3 months.
• Failure leads to withdrawal of authorisation.

By contrast, an SCR breach allows a 6-month recovery plan and 9 months total to restore coverage.

References

• Solvency II Directive 2009/138/EC, Articles 128–131.
• Delegated Regulation 2015/35, Articles 248–253.
• PRA Insurance Rulebook, Minimum Capital Requirement.

Cross-references

• Solvency capital requirement
• Insurance capital

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