15 years: Debt capital markets
In this video, Sukhy explains us about Own Funds and it's types - "Basic Own Funds" and "Ancillary Own Funds". She further highlights how much available capital Unlock Insurance has to cover its Minimum and Solvency Capital Requirements.
In this video, Sukhy explains us about Own Funds and it's types - "Basic Own Funds" and "Ancillary Own Funds". She further highlights how much available capital Unlock Insurance has to cover its Minimum and Solvency Capital Requirements.
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10 mins 3 secs
As part of the capital requirements under the Solvency 2 regime, European insurers are required to comply with the Solvency Capital Requirements and Minimum Capital Requirements. This guarantees that insurers always have enough capital available to withstand certain tail risk events. We dig into the detail around the coverage ratios of these requirements. In particular we delve into the definition of Own Funds and how much of this capital is actually eligible for the purposes of these ratios. We also apply this to calculate the SCR and MCR coverage ratios for a fictional company – Unlock Insurance
Key learning objectives:
What are Own Funds?
What are Eligible Own Funds?
How can we apply this to Unlock Insurance?
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An insurer’s Own Funds are the measurement of how much available capital an insurer has on the balance sheet to cover its SCR and MCR requirements. Own Funds can be split into two categories:
1.Basic Own Funds which are readily available within the insurance company. Basic Own Funds can then be split into the following Tiers of Capital:
2.Ancillary Own Funds are currently unpaid but can be called upon if required under certain conditions, such examples of these include guarantees or letters of credit.
Eligible Own Funds is the component of actual Own Funds which are eligible to qualify for the coverage of the SCR and MCR. The eligibility is decided by the regulator, which includes restrictions on the amount of each Tier of capital an insurance company can use to cover their SCR and MCR.
The restrictions for the purposes of the SCR are as follows:
The restrictions for the purposes of the MCR are as follows:
Unlock Insurance currently has a SCR requirement of EUR100m and a EUR40m MCR requirement. They also have the following Own Funds on their balance sheet:
SCR Coverage Ratio = Total Eligible Own Funds / SCR
All of Unlock Insurance’s capital falls within the SCR limits and therefore all their capital is eligible:
MCR Coverage Ratio = Total Eligible Own Funds / MCR
A maximum 20% of MCR can be covered by Tier 2 capital, therefore EUR8m of Tier 2 is eligible. No Tier 3 capital is eligible for the coverage of the MCR:
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