Own funds and the MCR

Two insurers each report €9,300m of own funds against an SCR of €5,000m. One has €7,300m of shareholders' equity and €2,000m of subordinated debt; the other has the reverse. They are not equally safe, and Solvency II says so: the second could count at most €2,500m of its debt and would not cover its SCR. Below the SCR sits a second line, the MCR, where the supervisor can take the licence away. RiskAtoms' MCR is €2,250m, set not by its formula but by the cap.

From the balance sheet to own funds

Basic own fundsBasic own funds: the excess of assets over liabilities on the Solvency II balance sheet, less own shares held, plus subordinated liabilities (Directive Art 88). are the excess of assets over liabilities on the Solvency II balance sheet plus subordinated liabilities (Directive Art 88). Ancillary own fundsAncillary own funds: items that are not on the balance sheet but can be called to absorb losses, such as unpaid share capital callable on demand or letters of credit; counted only with supervisory approval, and only as Tier 2 or 3 (Directive Arts 89–90, 96). are off-balance-sheet items a supervisor has approved. RiskAtoms has none. Its €9,300m, recalled from L3.8.12: Insurer investment risk and the ORSA:

Three tiers

Each item is tiered by two features (Directive Art 93): permanent availabilityPermanent availability: the item can be called up to absorb losses fully, both as a going concern and in winding-up (Directive Art 93(1)(a)). and subordinationSubordination: in a winding-up the item is repaid only after all policyholders and other creditors (Directive Art 93(1)(b))., judged with its duration and the absence of incentives to redeem, mandatory servicing costs and encumbrances. Tier 1 has substantially both; Tier 2 substantially subordination; Tier 3 the rest (Art 94). Ancillary own funds can only be Tier 2 or 3. The Delegated Regulation lists the items and their features: ordinary shares and the reconciliation reserveReconciliation reserve: the excess of assets over liabilities less own shares, foreseeable dividends, other basic own-fund items and restricted items. It holds retained earnings and every valuation difference from IFRS (Art 70). are Tier 1 (Arts 69–70); restricted Tier 1Restricted Tier 1: subordinated instruments that meet the Tier 1 features, for example undated notes that write down or convert when the SCR ratio falls to 75% or below; capped at 20% of Tier 1 (Arts 71, 82(3)). notes must be undated, uncallable for five years, with distributions the insurer can cancel and principal that writes down or converts when the SCR ratio falls to 75%, the MCR is breached, or the SCR has not been met for three months (Art 71); Tier 2 debt must be undated or have at least ten years' original maturity, no call in the first five years, and repayment suspended on an SCR breach (Art 73); Tier 3 includes net deferred tax assets and debt of at least five years (Arts 76–77).

Eligibility: how much of each tier counts

Art 82 limits the lower tiers. Against the SCR: Tier 1 at least half, Tier 3 under 15%, and Tier 2 and Tier 3 together at most half. Against the MCR, which is meant to be covered by the best capital: Tier 1 at least 80%, Tier 2 at most 20%, Tier 3 not at all (also Directive Art 98(4)). On the book:

All of the Tier 2 counts for the SCR; the 50% limit would start to bind only if the SCR fell below €4,000m. For the MCR only €450m of it counts.

The MCR

The MCRMinimum Capital Requirement (MCR): the level below which policyholders would face an unacceptable risk if the insurer carried on; calibrated to an 85% value at risk over one year, with a linear formula held between 25% and 45% of the SCR and above an absolute floor (Directive Art 129). is the last line (L2.7.05: Solvency I to Solvency II). It is computed quarterly from a linear formula (Art 248): non-life, α × net technical provisions + β × net written premiums for each segment, with Annex XIX's factors; life, percentages of technical provisions by type and of capital at risk (Art 251). The result is held inside a corridor of 25% to 45% of the SCR, and never below the absolute floorAbsolute floor (AMCR): the least MCR in euros whatever the formula says, by kind of business; revised for inflation every five years (Directive Arts 129(1)(d), 300)..

The linear MCR, €2,757.0m, is 55% of the SCR, above the 45% cap, so the MCR is €2,250m. The SCR would have to exceed €6,127m for the linear figure to sit inside the corridor. On the rules-in-outline SCR of €5,155.9m (L4.6.05: The standard formula: structure) the cap moves too and the MCR becomes €2,320.2m. The absolute floor for a composite writing liability classes is €4.0m + €4.0m = €8m, far below. Max and min do the corridor's work (M-A11: Min, max, floors and caps).

Directive 2009/138/EC Arts 93–98 and 129; Delegated Regulation (EU) 2015/35 Arts 69–82 and 248–253:

• $E_k$ is the eligible amount of tier $k$. TP₁: guaranteed benefits with profit participation; TP₂: future discretionary benefits; TP₃: index- and unit-linked; TP₄: other life and SLT health; CAR: capital at risk. All net of reinsurance, without risk margin, floored at nil.
• Each factor is a percentage (M-A01: Percentages). The MCR is a max inside a min inside a max (M-A11: Min, max, floors and caps). A composite also computes notional life and non-life MCRs (Art 252): here €1,180.7m and €1,069.3m.

Put a loss on Tier 1 until the SCR ratio falls under 100%, then under the MCR. Raise the SCR and watch the MCR rise with its cap; add Tier 2 or Tier 3 and see how much stops counting.

Directive 2009/138/EC Arts 87–99, 129, 138, 139, 144 and 300; Delegated Regulation (EU) 2015/35 Arts 69–82 and 248–253, Annex XIX as at 4 Nov 2026.

• Own funds are basic (excess of assets over liabilities plus subordinated debt) or ancillary (approved, off balance sheet, Tier 2 or 3 only).
• Tiers follow permanent availability and subordination: Tier 1 both, Tier 2 subordination, Tier 3 the rest; restricted Tier 1 below 20% of Tier 1.
• For the SCR: Tier 1 ≥ 50%, Tier 3 < 15%, Tier 2 + Tier 3 ≤ 50%. For the MCR: Tier 1 ≥ 80%, Tier 2 ≤ 20%, no Tier 3.
• MCR = max(min(max(linear, 25% SCR), 45% SCR), AMCR). RiskAtoms: linear €2,757.0m, capped at €2,250m; MCR ratio 344.4%.
• SCR breach: recovery plan in two months, restore in six. MCR breach: finance scheme in one month, restore in three, or lose the licence.

Basic own funds

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

Ancillary own funds

Ancillary own funds: items that are not on the balance sheet but can be called to absorb losses, such as unpaid share capital callable on demand or letters of credit; counted only with supervisory approval, and only as Tier 2 or 3 (Directive Arts 89–90, 96).

Reconciliation reserve

Reconciliation reserve: the excess of assets over liabilities less own shares, foreseeable dividends, other basic own-fund items and restricted items. It holds retained earnings and every valuation difference from IFRS (Art 70).

Permanent availability

Permanent availability: the item can be called up to absorb losses fully, both as a going concern and in winding-up (Directive Art 93(1)(a)).

Subordination

Subordination: in a winding-up the item is repaid only after all policyholders and other creditors (Directive Art 93(1)(b)).

Restricted Tier 1

Restricted Tier 1: subordinated instruments that meet the Tier 1 features, for example undated notes that write down or convert when the SCR ratio falls to 75% or below; capped at 20% of Tier 1 (Arts 71, 82(3)).

Minimum Capital Requirement

Minimum Capital Requirement (MCR): the level below which policyholders would face an unacceptable risk if the insurer carried on; calibrated to an 85% value at risk over one year, with a linear formula held between 25% and 45% of the SCR and above an absolute floor (Directive Art 129).

Absolute floor (AMCR)

Absolute floor (AMCR): the least MCR in euros whatever the formula says, by kind of business; revised for inflation every five years (Directive Arts 129(1)(d), 300).