Pillar 1 is concerned with how insurers value their liabilities (including the money that gets paid to policyholders in the event of a claim) and assets (such as government bonds, corporate bonds, shares, infrastructure, etc.), along with the additional capital they hold to ensure solvency. 

The rules also cover the amount of funds insurers need to hold in reserve to make sure they can pay policyholders' claims under stress. Insurers must calculate two solvency requirements: the (higher) Solvency Capital Requirement (SCR) and the (lower) Minimum Capital Requirement (MCR). The SCR is intended to cover the losses expected from a 1-in-200 year stress; a breach will result in regulatory intervention to restore the SCR position in the short term. An MCR breach, unless restored quickly, may lead to the loss of the insurer’s authorisation to conduct business. 

The SCR may be calculated using either a standard formula or using the firm’s own internal model: 

• Internal models: Under Solvency UK, firms are able to develop and use full or partial internal models tailored to their individual risk profiles to calculate capital requirements, but these models must be approved by the PRA. 

• Standard formula: Any company not using an internal model has to calculate capital requirements using a standard formula. 

Pillar 2 is concerned with how insurance businesses are governed, and how insurers identify, measure, monitor, manage and report the risks to which they are exposed. It ensures that insurers' businesses are managed to a high standard. 

Under Solvency UK, all insurers are required to carry out an Own Risk and Solvency Assessment (ORSA). The ORSA must include an assessment of a firm’s overall solvency needs, taking into account the firms specific risk profile, risk appetite and business strategy. 

Pillar 3 sets out what information insurers are required to report – under Solvency UK; these reporting requirements are substantial. Some reports and templates are required to be publicly available; others are privately reported to the PRA. Reporting requirements include quarterly and annual Quantitative Reporting Templates (QRTs), which firms must report privately to the PRA. Under Solvency UK, these are set out in the PRA’s Rulebook. 

Firms are also required to publish a Solvency Financial Condition Report (SFCR) on their websites – this is an annual public quantitative and narrative report, which is available to anyone to download and read. The PRA also makes ad hoc requests for data from time to time; while these are often voluntary in nature, insurers will do their best to comply. 

Information on Solvency II / Solvency UK can be found on the PRA’s dedicated webpage and within the PRA’s Rulebook.  European requirements are set out on EIOPA’s dedicated webpage.  Many consulting firms have provided valuable guides, which interested parties can access. 

Our dedicated team focus on all aspects of the prudential regulation of insurers. We engage closely with the PRA, HM Treasury, our members and other stakeholders throughout all stages of the ‘policy cycle’. We do both proactive work (for example, developing position papers and convening member groups) and reactive work (for example, responding to consultation papers on behalf of our members). 

Prudential regulations are in place to help the PRA meet its statutory objectives to ensure the safety and soundness of firms, and to protect policyholders.  Consumers can buy insurance products with confidence, knowing that even if their insurer runs into difficulties, their claims and / or pensions will still be paid. 

About 400 UK insurers meet the threshold to be subject to the full range of Solvency UK requirements.  All other UK insurers are subject to a simpler, but nevertheless still very prudent ‘Non-Directive’ regime. 

Solvency UK is very similar to Solvency II, albeit with some modifications intended to make it a better fit to the unique nature of the UK insurance sector.  There are some differences in the way UK insurers calculate their liabilities, and in the way they report data to the regulator.  Solvency UK is mainly set out in the PRA’s rulebook, unlike the European version of Solvency II which is set out in legislation. 

The Solvency UK reforms are intended to incentivise insurers to invest in productive assets, including those needed to support the UK’s transition to net-zero.  Previously, insurers were forced into investing in traditional assets with rigidly fixed cash flows – it was much easier to invest in a bond from a coal mining company than in a wind farm!  The new rules are intended to remove perverse incentives such as this.