Insurance capital

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Reviewed by Apex Insurance Brokers · Last reviewed 2026-06-22

Category: Capital management · Reviewed by Tim Roche, Director · PI & Commercial · Last reviewed

Insurance capital is the surplus of an insurer’s assets over its liabilities, held to absorb unexpected losses and meet regulatory requirements. It is the cushion that protects policyholders if claims and expenses exceed premiums and reserves.

Components — own funds under Solvency II

Solvency II divides own funds into three tiers based on the quality of capital (Article 93, Directive 2009/138/EC):

• Tier 1 — ordinary share capital, retained earnings, perpetual subordinated debt with strong loss-absorbing features. Highest quality, fully available to absorb losses on a going concern.
• Tier 2 — subordinated debt with weaker loss-absorbing features.
• Tier 3 — limited capital instruments and net deferred tax assets.

Specific quantitative limits restrict the use of Tier 2 and 3 to cover the SCR and MCR.

Why insurers hold capital

• Regulatory requirement (MCR / SCR).
• Rating agency requirement (financial strength rating).
• Counterparty requirement (cedents will not reinsure unrated firms).
• Customer perception (insureds prefer A-rated carriers).
• Operational resilience (absorbing model error, catastrophe shocks).

References

• Solvency II Directive 2009/138/EC, Articles 87–99.
• PRA Insurance Rulebook, Own Funds.
• IFoA capital management guides.

Cross-references

• Risk based capital
• Solvency capital requirement
• Minimum capital requirement

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