European Actuarial Journal

, Volume 8, Issue 1, pp 169–196 | Cite as

Defining principles of a robust insurance solvency regime

  • René Schnieper
Original Research Paper


The article deals with the fundamental features of a solvency regime: valuation and risk modelling. The paper argues that for solvency testing purposes the valuation method of choice is market consistent valuation. Statutory valuation based on historical costs is at best irrelevant and possibly misleading in the case of a compulsory winding up of a company and of forced sales of assets. As far as risk modelling is concerned, it is argued that stress tests and scenarios have an important role to play. They can complement or replace stochastic risk models. They have in particular the advantage of enabling an effective involvement of senior managers and Board members in the company’s quantitative risk management. It is argued that supervisors could use two co-existing models for solvency testing purposes: a probabilistic model and a set of scenarios based Solvency Capital Requirements. The paper draws on the experience of the EU regulatory authorities, CEIOPS and EIOPA, with the development of Solvency II. It also draws on the experience of FINMA, the Swiss supervisory authority, with the implementation of the Swiss Solvency Test. Finally, it takes into account the lessons of the Japanese life insurance crisis from 1997 to 2001.


Solvency testing Solvency II Swiss Solvency Test Market consistent valuation Statutory valuation Matching adjustment Volatility adjustment Risk modelling Stress tests Scenarios Restructuring measures 



A solvency assessment tool defines a required solvency capital and an available solvency capital. The solvency ratio is the ratio of available capital to required capital. These quantities bear different names depending on the jurisdiction. Within the Solvency II framework of the European Union the available capital are the Own Funds and the required capital is the Solvency Capital Requirements SCR. Within the framework of the Swiss Solvency Test those quantities are the Risk Bearing Capital and the Target Capital respectively. To be precise, the Target Capital is equal to the SCR plus the Market Value Margin. The latter quantity is the margin which must be added to the expected value of a liability in order to obtain the market value of that liability. The Market Value Margin is sometimes also referred to as Risk Margin.

European Insurance and Occupational Pension Authority


Predecessor Organisation of EIOPA


Finanzmarktaufsicht, Swiss financial market supervisor


Swiss Solvency Test


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Copyright information

© EAJ Association 2018

Authors and Affiliations

  1. 1.MännedorfSwitzerland

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