The risk margin · RiskAtoms Academy

By the end you will be able to

1Explain the risk margin as the cost of capital a reference undertaking needs to take the obligations over, and which risks it holds capital for (Directive Art 77(5); Delegated Regulation Arts 37–39).
2Calculate it by projecting the SCR, and rank the simplifications from the most to the least exact (Art 58; EIOPA Guideline 62).
3Apply the EU's method from 30 January 2027 (4.75%, max(0.96^t; 50%)) and the UK's (4%, max(λ^t; 25%)).
4Measure the effect on RiskAtoms Insurance SE: the risk margin falls from €1,878.4m to €1,272.6m in the EU from 2027, or €933.2m on the UK method.

Why it matters

Suppose RiskAtoms Insurance SE wanted to hand its annuities to another insurer. Paying over the best estimate would not be enough: the buyer would have to hold capital against them for decades, and wants paying for that. The risk margin is that payment. For long-dated business it is large and sensitive to rates, which is why both the EU and the UK cut it in their reviews of Solvency II.

Core explanation

The cost of holding capital until run-off

Illustrative dataRiskAtoms Insurance SE under Solvency II

The same made-up composite insurer as Modules 1.8, 2.2 and 3.8, reporting in € millions at 31 December 2025: €70bn of IFRS assets, €9.0bn of non-life premiums, annuities, savings with guarantees, term assurance and income protection. Level 3 booked own funds of €9,300m against an SCR of €5,000m, a ratio of 186%; those stay the insurer's figures. Module 4.6 reads them against the rules article by article: Directive 2009/138/EC and Delegated Regulation (EU) 2015/35 as in force at that date, and the 2025 review where it applies from 30 January 2027. Every policy, bond and figure is invented. Where a page adds an assumption of its own, it is labelled illustrative.

This page reruns the risk margin projection of the Module 4.6 data in two blocks, life and non-life, and adds two illustrative checks of its own: a duration shortcut and a projection with no diversification between the blocks illustrative.

Technical provisions are the best estimate (L4.6.03: Technical provisions: the best estimate) plus a risk margin, chosen so that their total is what another insurer would need to take the obligations over (Directive Art 77(3) and (5)). There is no market for that price, so Solvency II builds it: imagine a reference undertaking that takes the business over and must hold the SCR until it runs off. The risk margin is what holding that capital costs.

Which capital, at what cost

Only non-hedgeable risk. The reference undertaking holds assets that minimise its market risk, so its SCR covers non-hedgeable risk: underwriting, reinsurance default and operational risk, and market risk other than interest rate risk only where it cannot be avoided and is material. The data takes that last part as nil (Delegated Regulation Art 38(1)(h) and (i)).
Two buyers, not one. Life and non-life obligations go to two separate reference undertakings, and neither counts the loss-absorbing capacity of deferred taxes (Art 38(1)(b) and (k)).
A fixed price. The cost-of-capital rate is the same for every insurer: 6% a year above the risk-free rate (Art 39), whatever its own investors want.

Projecting the SCR, and the shortcuts

The formula needs the SCR for every future year, which few firms calculate in full. Art 58 allows simplifications where proportionate, and EIOPA's Guideline 62 ranks them; a firm picks the level whose complexity goes no further than the nature, scale and complexity of its risks need:

Level	What is approximated
1	Approximate the individual risks or sub-risks in each future SCR(t)
2	Approximate the whole SCR(t) for each year, for example in proportion to the best estimate
3	Approximate all future SCRs at once, with the modified duration of the liabilities
4	Approximate the risk margin as a percentage of the best estimate

The Module 4.6 data works at level 2: each block's SCR runs off in proportion to its outstanding cash flows. Non-life claims are paid in a few years, annuities over decades, so the two blocks run off at very different speeds.

The 2025 review and the UK

Both reviews kept the method and changed two numbers: a lower cost-of-capital rate, and a risk tapering factor that scales down future SCRs, because the capital a run-off needs falls as risks diversify over time.

Method	CoC	Factor on SCR(t)	In force
EU today	6%	1	1 January 2016 to 29 January 2027
EU from 2027	4.75%	max(0.96^t; 50%)	from 30 January 2027
UK, life (long-term)	4%	max(0.9^t; 25%)	from 31 December 2023
UK, non-life (general)	4%	1 (λ = 1)	from 31 December 2023

EU todayEU from 2027: max(0.96^t; 50%)UK life: max(0.9^t; 25%)

The formal version

A discounted sum of future capital charges

Delegated Regulation Art 37(1), with r_t+1 the basic risk-free rate for maturity t + 1:

\text{RM} = \text{CoC} \cdot \sum_{t \ge 0} \frac{\text{SCR}(t)}{(1 + r_{t+1})^{t+1}} \qquad \text{from 2027:}\quad \text{RM} = 4.75\% \cdot \sum_{t \ge 0} \frac{\max(0.96^{t};\, 50\%)\, \text{SCR}(t)}{(1 + r_{t+1})^{t+1}}

When the SCR runs off geometrically, SCR(t) = S·q^t, and rates are zero, the sum is a geometric series (Math Atom M-A07), and the year the floor binds comes from logarithms (M-A05):

\text{RM} = \frac{\text{CoC} \cdot S}{1 - q}, \qquad 0.96^{t} < 0.5 \iff t > \frac{\ln 0.5}{\ln 0.96} = 16.98

Try it

Switch between today's, the EU's 2027 and the UK's method, then set your own. From the EU or UK method, lower λ for the life block and watch the long tail of annuity capital shrink (today's method has a 100% floor, so λ does nothing until you lower the floor); the non-life block is gone within a decade whatever you do.

Try itRun off the SCR and charge for it

Method

Cost-of-capital rate6.00%

Floor of the taper100%

λ, life block1.000

λ, non-life block1.000

Projected SCR(t)SCR(t) × max(λ^t; floor)

Booked risk margin on this basis€1,878.4m

Solvency ratio (SCR held)186.0%

Projection: life + non-life742.8 + 359.1

Change in own funds€0.0m

Against today's projection100.0%

Tapernone (100% floor)

Illustrative, € millions, before tax. The book carries a risk margin of €1,878.4m; the two-block projection gives €1,101.8m on today's method, so each basis moves the booked figure by the ratio of its projection to today's. The SCR is held at €5,000m and own-funds changes are before tax.

Worked example

RiskAtoms Insurance SE's risk margin

€ millions at 31 December 2025. The non-hedgeable SCR is €4,033.0m: default 150, life 2,054.0, health 198.1 and non-life 2,801.2 aggregated with the standard formula correlations, plus operational risk of 438.6.

From the SCR to the booked risk margin

Step 1 of 5

1
Split the non-hedgeable SCR into two blocks
$\text{SCR}(0) = \underbrace{1{,}457.0}_{\text{life}} + \underbrace{2{,}576.0}_{\text{non-life}} = 4{,}033.0\text{m}$
The data splits the diversified total by each module's contribution (Euler allocation), with reinsurance default in non-life and operational risk shared by provisions.

Method	Risk margin	Change	Own funds	Ratio
EU today (6%)	1,878.4	–	9,300.0	186.0%
EU from 2027	1,272.6	−605.8	9,905.8	198.1%
UK method	933.2	−945.2	10,245.2	204.9%

EU today

€1,878.4m

EU from 2027

€1,272.6m

UK method

€933.2m

Before tax and with the SCR held at €5,000m, the 2027 method adds €605.8m to own funds and 12.1 ratio points. The UK method, with no taper on non-life but a steeper one on life, adds €945.2m. These are risk-margin effects only: L4.6.12: The 2025 review: Solvency II from 2027 puts them together with the review's other changes.

Two buyers, no diversification between them

Art 38(1)(b) gives life and non-life to separate reference undertakings, so the diversification between them should not lower the SCR(t). The data's split keeps it. Recalculating each block on its own modules, with the standard formula correlations inside each, gives SCR(0) of €2,304.5m for life and €3,125.5m for non-life, €5,430.0m in all, and a risk margin of €1,610.5m on today's method, 46.2% more than the data's projection illustrative. The book's figures stay as they are.

Regulatory lens

Directive 2009/138/EC Art 77(3) and (5); Delegated Regulation (EU) 2015/35 Arts 37, 38, 39 and 58; EIOPA Guidelines on valuation of technical provisions, Guideline 62 (EIOPA-BoS-14/166, unchanged in the 2022 revision EIOPA-BoS-22/217) as at 4 Nov 2026.

In the EU from 2027

from 2027 Directive (EU) 2025/2 rewrites Art 77(5) so that the SCR(t) are adjusted by an exponential, time-dependent factor, and fixes the cost-of-capital rate at 4.75% from 30 January 2027, with no review before 31 January 2032 (Art 77(6)). Delegated Regulation (EU) 2026/269 sets the factor at max(0.96^t; 50%) in Art 37(1) and the rate in Art 39, both from 30 January 2027.

In the UK

UK The Risk Margin Regulations (SI 2023/1346) cut the rate to 4% and added the factor max(λ^t; 0.25), λ = 0.9 for life and 1 for non-life, from 31 December 2023. Since 31 December 2024, when the Delegated Regulation was revoked in the UK, the same method sits in regulation 7B of SI 2023/1347 (long-term and general business). The UK comparison is in L4.6.13: Solvency UK and global standards.

Art 37 the formula, Art 38 the reference undertaking, Art 39 the rate, Art 58 simplifications.

Spark Atoms

Spark AtomSeventeen years to half

0.96 a year sounds gentle. It halves in 17.0 years, so the EU floor starts to bind at year 17; the UK's 0.9 reaches its quarter at year 14. Short business barely notices the taper: almost all its capital is needed in the first few years.

Spark AtomThe diversification the formula forgets

Two buyers mean no credit for life and non-life risks offsetting each other. On this book that is worth 46.2% of the projected risk margin illustrative, so a composite could argue its risk margin overstates what a single buyer would charge.

Key takeaways

The risk margin is the cost of providing the SCR for the obligations until they run off, at a fixed cost-of-capital rate, discounted on the basic risk-free curve (Art 77(5); Delegated Regulation Art 37).
Only non-hedgeable risk counts; life and non-life go to separate reference undertakings; no deferred-tax relief (Art 38).
Most firms project SCR(t) with simplifications; EIOPA's Guideline 62 ranks four levels, from individual risks down to a percentage of the best estimate.
EU from 30 January 2027: 4.75% and max(0.96^t; 50%). UK since 31 December 2023: 4% and max(λ^t; 25%), λ 0.9 life, 1 non-life.
RiskAtoms Insurance SE: €1,878.4m today; €1,272.6m on the 2027 method (ratio 198.1%), €933.2m on the UK method (204.9%), before tax.

Reaction

Check what stuck

Question 1 · objective 1

A run-off needs an SCR of €300m now, €200m in a year and €100m in two years, then nothing. Rates are zero. What is the risk margin at a 6% cost of capital, in €m?

€m

Question 2 · objective 1

Which risk does the reference undertaking's SCR leave out?

AInterest rate risk: its assets are assumed to match the obligationsBReinsurance default riskCOperational riskDLongevity risk

Question 3 · objective 2

An SCR of €100m runs off by 10% a year for ever (SCR(t) = 100 × 0.9^t) and rates are zero. What is the risk margin at 6%, in €m?

€m

Question 4 · objective 3

Under the EU's 2027 method, from which year t does the 50% floor first bind, since 0.96^t < 0.5?

Question 5 · objective 4

On the 2027 method RiskAtoms Insurance SE's risk margin falls by €605.8m with the SCR held at €5,000m. What is its solvency ratio, in %?

%

Glossary

Risk margin: Risk margin: the amount on top of the best estimate that another insurer would need to take over the obligations; calculated as the cost of providing the SCR until they run off (Directive Art 77(5)).
Reference undertaking: Reference undertaking: the imaginary insurer that takes the obligations over in the risk margin calculation. It starts with no other business, holds assets that minimise its market risk, and life and non-life are taken over by two separate ones (Delegated Regulation Art 38).
Cost-of-capital rate: Cost-of-capital rate: the annual return above the risk-free rate that investors are assumed to want for providing the SCR. 6% today (Art 39); 4.75% in the EU from 30 January 2027; 4% in the UK.
Non-hedgeable risk: Non-hedgeable risk: risk that cannot be removed by buying assets in deep and liquid markets: underwriting risk, reinsurance default risk, operational risk. Only these enter SCR(t).
Risk tapering: Risk tapering: a factor that scales down future SCRs, max(λ^t; floor), because capital needs fall as risks run off. EU from 2027: λ = 0.96, floor 50%. UK: λ = 0.9 for life, 1 for non-life, floor 25%.
Simplifications: Simplifications: shortcuts for projecting the SCR(t), ranked in a four-level hierarchy by EIOPA (Guideline 62), allowed where proportionate (Delegated Regulation Art 58).

Deep Dives & Origins

Deep Dives

L3.8.07: Longevity risk: longevity risk, the risk that drives the long tail of the life block. Foundation.
L4.6.12: The 2025 review: Solvency II from 2027: the 2025 review as a whole, with the risk margin alongside the other changes. Intermediate.

Origins

Directive 2009/138/EC, Art 77, legislation.gov.uk copy of the EU text.
Commission Delegated Regulation (EU) 2015/35, Arts 37, 38, 39 and 58 as adopted (legislation.gov.uk).
Directive (EU) 2025/2, amended Art 77(5) and (6) (LawPlayer copy of the OJ text).
Commission Delegated Regulation (EU) 2026/269 of 29 October 2025, Art 1 (amending Arts 37(1) and 39) and Art 2; Commission draft C(2025) 7206 final.
EIOPA, Guidelines on valuation of technical provisions, EIOPA-BoS-14/166, Guideline 62; revised Guidelines EIOPA-BoS-22/217.
The Insurance and Reinsurance Undertakings (Prudential Requirements) (Risk Margin) Regulations 2023, SI 2023/1346; The Insurance and Reinsurance Undertakings (Prudential Requirements) Regulations 2023, SI 2023/1347, reg 7B as inserted by SI 2024/1083 (legislation.gov.uk).

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