Category: Global regulation · Reviewed by Chrissie Anderson, Client Executive · Last reviewed 2026-06-05
Solvency II is the European Union’s harmonised prudential supervisory framework for insurance and reinsurance undertakings, in force since 1 January 2016. It is structured on three pillars (quantitative capital requirements, governance and risk management, and supervisory reporting and public disclosure) and is calibrated to the 99.5% one-year Value-at-Risk standard. The UK retained Solvency II at Brexit and is now reforming it as Solvency UK.
Category: Global insurance regulation Also known as: SII, Directive 2009/138/EC Jurisdiction: European Union (in force 1 January 2016); United Kingdom (retained law) Founding instrument: Directive 2009/138/EC, as amended by Directive 2014/51/EU (Omnibus II) Related concepts: EU insurance regulation, EIOPA, Prudential Regulation Authority
Solvency II is built around two key capital metrics: the Solvency Capital Requirement (SCR), calibrated to allow the undertaking to absorb losses corresponding to a 99.5% one-year Value-at-Risk; and the Minimum Capital Requirement (MCR), the lower threshold below which the supervisor must intervene. Undertakings calculate SCR using either the Standard Formula prescribed in the Delegated Regulation or, with supervisory approval, a full or partial Internal Model.
The three pillars are: Pillar 1, quantitative capital and technical provisions; Pillar 2, system of governance, ORSA (Own Risk and Solvency Assessment), and supervisory review; Pillar 3, supervisory reporting (quantitative reporting templates, QRTs) and public disclosure (Solvency and Financial Condition Report, SFCR).
The framework comprises Directive 2009/138/EC (Level 1), the Delegated Regulation (EU) 2015/35 (Level 2 — the principal “rulebook”), Implementing Technical Standards and Regulatory Technical Standards (Level 2.5), and EIOPA Guidelines (Level 3). The Directive was substantively amended by Directive 2014/51/EU (Omnibus II) before commencement. A first review of Solvency II is now being implemented through Directive (EU) 2025/2 (the so-called Solvency II 2020 Review).
Insurers value their balance sheets on a Solvency II economic basis (market-consistent valuation of assets and best estimate plus risk margin valuation of liabilities), calculate SCR, and report quarterly to the national supervisor. Annual reporting includes the SFCR (public) and Regular Supervisory Report (private). The ORSA process requires the firm’s own forward-looking view of risk and capital under multiple scenarios. Major insurers operating internal models are subject to model approval and ongoing model change governance.
Solvency II was retained in UK domestic law at the end of the Brexit transition period and forms the basis of the Solvency UK regime. The PRA’s reforms (in force from 2024 with phased implementation) reduce the risk margin for long-term insurers by approximately 65%, broaden the matching adjustment eligibility, and simplify the Internal Model application process — changes that diverge from continuing EU calibration and are designed to free up insurer capital for productive investment.
This entry is part of the Apex Insurance Wiki. Last reviewed by Matt Bartlett on 2026-06-05. Next review: 2026-12-05.
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