Category: Capacity and rating · Reviewed by Amy Price, Account Executive · Last reviewed 2026-06-05
The Solvency II standard formula is the prescribed methodology for calculating the Solvency Capital Requirement using calibrated risk modules and correlation matrices defined by EIOPA in the Commission Delegated Regulation (EU) 2015/35 [1]. Most small and medium-sized European insurers use the standard formula, while larger insurers typically use approved internal models.
Category: Capacity and rating Also known as: standard formula, Solvency II standard formula Related concepts: Solvency II SCR, Solvency II ORSA, solvency ratio
The standard formula decomposes the SCR into risk modules:
Each risk module is calibrated to a 1-in-200 year value-at-risk; the modules are aggregated with prescribed correlation matrices to give the basic SCR; operational risk is then added; and an adjustment for loss-absorbing capacity of technical provisions and deferred taxes is applied.
The standard formula is set out in the Solvency II Directive 2009/138/EC [2] and detailed in the Commission Delegated Regulation (EU) 2015/35 [1]. The UK PRA has powers under the Insurance Rulebook to permit entity-specific parameters (USPs) where the standard calibration does not adequately reflect the insurer’s risk profile.
The UK government’s Solvency UK reform programme is recalibrating certain elements of the standard formula (matching adjustment, risk margin) for UK-domiciled insurers.
For most UK insurers the standard formula is the operative SCR calculation method. The calculations are performed in actuarial models and reported quarterly in QRT returns. The insurer’s actuarial function maintains the calculations and explains material movements to senior management and the board.
The standard formula is not bespoke to individual insurers; it applies the same calibrations across the European market. Larger and more specialised insurers (including most Lloyd’s syndicates collectively, through the Lloyd’s capital model) typically use approved partial or full internal models that better reflect their risk profile — particularly for catastrophe risk and reserve risk where the standard formula calibration may not capture the full distribution of outcomes.
An illustrative example: a small UK commercial insurer with £80m of GWP uses the standard formula to calculate an SCR of £45m. The principal modules are: non-life underwriting risk £30m (premium and reserve risk £22m, catastrophe £10m, lapse £1m, with diversification of £3m); market risk £8m; counterparty default risk £3m; operational risk £5m. Diversification across modules reduces the total to the £45m SCR.
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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