The Solvency II architecture

RiskAtoms Insurance SE reports one number to its board each quarter: 186.0%. Behind it sit about 300 articles of a directive, a longer delegated regulation, technical standards for every template, and EIOPA guidelines on how to read them all. Level 3 built that number in outline. This module reads the rules behind it, article by article, and starts here: which text says what, who it applies to, and what the SCR is meant to measure.

L2.7.05: Solvency I to Solvency II introduced the three pillars: quantitative requirements, governance and supervision, reporting and disclosure. In the Directive they map onto chapters you will meet across this module:

Four layers of text

Solvency II follows the pattern the Lamfalussy report proposed for EU securities law in 2001: short principles agreed by the legislators, detail written by the Commission, convergence work by the supervisors, and enforcement. Click each layer.

Who is in scope

Art 4 keeps very small insurers out, if they meet every condition: premiums and technical provisions at or below the thresholds, the same provisions test for their group, no liability, credit or suretyship business beyond ancillary risks, and only a little reinsurance accepted. The 2025 review raises the thresholds:

Inside the regime, the rules apply with proportionalityProportionality: applying the rules in a way that fits the nature, scale and complexity of a firm's risks (Directive Art 29(3)). (Art 29(3)). From 30 January 2027 the Directive makes that concrete. A firm that meets the tests of Art 29a for two years running notifies its supervisor, which has two months to object (Art 29b); it is then a small and non-complex undertakingSmall and non-complex undertaking (SNCU): from 30 January 2027, a firm that has met the tests of Art 29a for two years running and notified its supervisor. It may then use the Directive's proportionality measures without asking first. and may use the listed proportionality measures without asking (Art 29c), such as an ORSA every two years instead of every year (Art 45(5)) or a prudent deterministic value for immaterial life options and guarantees (Art 77(8)). Any other firm needs the supervisor's prior approval for each measure (Art 29d).

RiskAtoms Insurance SE is a mixed undertaking under Art 29a(1)(c): life and health provisions are 84% of its best estimates and non-life premiums 80% of its €11,287m of premiums. Five of the nine tests can be run on the book:

The interest rate charge of €393.0m (L3.8.11: Insurer asset-liability management) is well inside its test, but life provisions of €42,708m and non-life premiums of €9,000m are far beyond theirs. This insurer applies the full regime, and proportionality for it means only Art 29(3) and any measure its supervisor approves.

What the SCR measures

Art 101(3) fixes the calibration in four sentences:

The Solvency Capital Requirement shall be calibrated so as to ensure that all quantifiable risks to which an insurance or reinsurance undertaking is exposed are taken into account. It shall cover existing business, as well as the new business expected to be written over the following 12 months. With respect to existing business, it shall cover only unexpected losses. It shall correspond to the Value-at-Risk of the basic own funds of an insurance or reinsurance undertaking subject to a confidence level of 99.5% over a one-year period.

Three choices are packed in. The measure is value at riskValue at risk (VaR) at 99.5%: the loss that is exceeded with probability 0.5%, the 99.5% quantile of the loss distribution: a one-in-200-year loss over one year., a quantile (M-C09: Quantiles), not the average loss beyond it. The confidence level is 99.5%, a one-in-200-year loss. And the quantity at risk is basic own fundsBasic own funds: the excess of assets over liabilities on the Solvency II balance sheet, plus subordinated liabilities, less own shares held (Directive Art 88)., the whole market-consistent balance sheet, so a fall in asset values and a rise in technical provisions count alike. Expected losses are already in the best estimate; the SCR is for the surprise. Art 101(4) lists the risks it must cover at least: non-life, life and health underwriting, market, credit and operational risk.

Let $L$ be the loss in basic own funds over the next year, in today's money (Directive Arts 88 and 101(3)):

• $A$ and $L_{\text{SII}}$ are assets and liabilities valued under Art 75 and the technical provision rules (L4.6.02: Market-consistent valuation and the risk-free curve to L4.6.04: The risk margin).
• The VaR is the 99.5% quantile of $L$. For a normal loss with mean zero and standard deviation $\sigma$, it is $z_{0.995}\,\sigma = 2.576\,\sigma$.
• The standard formula (L4.6.05: The standard formula: structure) does not compute a quantile directly: it applies shocks each calibrated to that standard, and combines them with correlations. An internal model (L4.6.09: Internal models) estimates the distribution itself.

Suppose, for illustration, the insurer's one-year loss were normal with the standard deviation that makes its 99.5% VaR exactly €5,000m: €1,941m. Move the confidence level, switch to expected shortfall, then fatten the tails and watch the capital.

€ millions at 31 December 2025. Every figure is in Module 1.8 or the Level 3 book; this lesson only lays them out the way Solvency II reads them.

The base is Directive 2009/138/EC and Delegated Regulation (EU) 2015/35 as in force at 31 December 2025. The 2025 review (Directive (EU) 2025/2 and Delegated Regulation (EU) 2026/269) applies from 30 January 2027; L4.6.12: The 2025 review: Solvency II from 2027 works it through. Statements on where rules stand are as at 4 November 2026 as at 4 Nov 2026.

Groups, the US approach and the IAIS Insurance Capital Standard are in L4.6.13: Solvency UK and global standards; the supervisory review of the ORSA in M4.9: Supervision, stress testing and disclosure.

• Directive 2009/138/EC sets principles; Delegated Regulation 2015/35 the detail and every factor; RTS and ITS the formats; EIOPA Guidelines bind by comply or explain.
• Art 4 keeps out firms below €5m of premiums and €25m of provisions, and from 30 January 2027 below €15m and €50m, if they meet every condition.
• From 2027, small and non-complex undertakings (Art 29a) may use the listed proportionality measures after notifying; other firms need approval for each.
• The SCR is the 99.5% one-year VaR of basic own funds, covering unexpected losses on existing business and the next 12 months' new business (Art 101(3)).
• RiskAtoms Insurance SE: assets €69,500m, technical provisions €52,800m, own funds €9,300m against an SCR of €5,000m: 186.0%; MCR ratio 344.4%.

Directive 2009/138/EC

Directive 2009/138/EC (Solvency II): the Level 1 text, agreed by the European Parliament and the Council. Member states transpose it into national law. It sets the principles, such as the SCR's calibration (Art 101).

Delegated Regulation (EU) 2015/35

Delegated Regulation (EU) 2015/35: the Commission's Level 2 text that fills in the Directive's detail, such as every standard formula factor. As a regulation it applies directly, with no transposition.

Technical standards (RTS, ITS)

Technical standards: rules EIOPA drafts and the Commission adopts as regulations, either regulatory (RTS) or implementing (ITS), under Regulation (EU) No 1094/2010, Arts 10 and 15. The reporting templates are an ITS.

EIOPA Guidelines

EIOPA Guidelines: Level 3 texts. Supervisors and firms must make every effort to comply, and each supervisor says within two months whether it complies or why not: comply or explain (Regulation 1094/2010, Art 16(3)).

Proportionality

Proportionality: applying the rules in a way that fits the nature, scale and complexity of a firm's risks (Directive Art 29(3)).

Small and non-complex undertaking

Small and non-complex undertaking (SNCU): from 30 January 2027, a firm that has met the tests of Art 29a for two years running and notified its supervisor. It may then use the Directive's proportionality measures without asking first.

Basic own funds

Basic own funds: the excess of assets over liabilities on the Solvency II balance sheet, plus subordinated liabilities, less own shares held (Directive Art 88).

Value at risk (99.5%)

Value at risk (VaR) at 99.5%: the loss that is exceeded with probability 0.5%, the 99.5% quantile of the loss distribution: a one-in-200-year loss over one year.

Reconciliation reserve

Reconciliation reserve: the Tier 1 item that collects the rest of the excess of assets over liabilities after share capital and other listed items, less foreseeable dividends.