Solvency II risk margin

Cost-of-capital method on a projected SCR, comparing the current 6% rule with the amended 4.75% rate and tapering of Directive (EU) 2025/2.

Inputs

SCR projection

SCR todayRun-off a year%Years projectedRisk-free rate (flat)%

Risk margin, current rule (6%)

205

Risk margin, amended (4.75%, tapering)

142

From 30 January 2027

Reduction

30.9%

Year	SCR	Discount factor	Current	Taper	Amended
0	500	0.9756	29.27	1.000	23.17
1	440	0.9518	25.13	0.975	19.40
2	387	0.9286	21.57	0.951	16.24
3	341	0.9060	18.52	0.927	13.59
4	300	0.8839	15.90	0.904	11.38
5	264	0.8623	13.65	0.881	9.52
6	232	0.8413	11.72	0.859	7.97
7	204	0.8207	10.06	0.838	6.67
8	180	0.8007	8.64	0.817	5.59
9	158	0.7812	7.42	0.796	4.68
10	139	0.7621	6.37	0.776	3.91
11	123	0.7436	5.47	0.757	3.28
12	108	0.7254	4.69	0.738	2.74
13	95	0.7077	4.03	0.720	2.30
14	84	0.6905	3.46	0.702	1.92
15	73	0.6736	2.97	0.684	1.61
16	65	0.6572	2.55	0.667	1.35
17	57	0.6412	2.19	0.650	1.13
18	50	0.6255	1.88	0.634	0.94
19	44	0.6103	1.61	0.618	0.79
20	39	0.5954	1.39	0.603	0.66
21	34	0.5809	1.19	0.588	0.55
22	30	0.5667	1.02	0.573	0.46
23	26	0.5529	0.88	0.559	0.39
24	23	0.5394	0.75	0.545	0.32
25	20	0.5262	0.65	0.531	0.27
26	18	0.5134	0.55	0.518	0.23
27	16	0.5009	0.48	0.505	0.19
28	14	0.4887	0.41	0.500	0.16
29	12	0.4767	0.35	0.500	0.14

The SCR for the existing business is projected year by year until it runs off, either as a geometric decline or as your own list. The discount curve is flat.
Current rule: a cost of capital of 6%. Amended rule (Directive (EU) 2025/2, to be applied from 30 January 2027): 4.75%, with each year's SCR weighted by max(0.975^t, 50%).

Current: RM = 6\% \sum_{t \ge 0} \frac{\text{SCR}_t}{(1+r)^{t+1}}
Amended: RM = 4.75\% \sum_{t \ge 0} \frac{\text{SCR}_t\,\max(0.975^t, 0.5)}{(1+r)^{t+1}}