Technical provisions (Solvency II)

Category: Capital management · Reviewed by Simon Temme, Account Executive · Last reviewed

Technical provisions (Solvency II)

Technical provisions (TPs) under Solvency II are the value of insurance and reinsurance liabilities recorded on the balance sheet. They are calculated as the best estimate plus a risk margin, as required by Article 77 of the Solvency II Directive.

Best estimate

The probability-weighted average of future cash flows, taking into account the time value of money using a risk-free interest rate term structure published by EIOPA / the PRA. The best estimate must:

• Reflect the expected present value of all in- and out-flows arising from existing obligations and the next 12 months of business.
• Be calculated gross of reinsurance, with reinsurance recoveries shown separately as an asset.
• Use actuarial and statistical methods appropriate to the line of business.
• Include allowance for expenses, claims handling and ULAE.

Risk margin

The amount required to ensure the value of technical provisions equals what would be required to transfer the obligations to a third party — calculated as the present value of the cost of holding the SCR for non-hedgeable risks for the remaining run-off, using a 6% cost-of-capital rate (5% in the post-Brexit UK regime from end-2023, per HMT and PRA reforms).

Segmentation

Technical provisions are reported by:

• Solvency II line of business (16 non-life lines, 33 life lines in the QRTs).
• Currency.
• Geographic territory (homogeneous risk groups).

References

• Solvency II Directive 2009/138/EC, Articles 76–86.
• Delegated Regulation 2015/35.
• PRA Insurance Rulebook, Technical Provisions.
• HMT (2023). Reforming the Risk Margin.

Cross-references

• Risk margin Solvency II
• IBNR
• Outstanding claims reserve

Maintained by Matt Bartlett, Director, Apex Insurance Brokers Limited. FCA FRN 724952. Companies House 07014570.