View source for Definition:Eligible own funds to meet SCR

🛡️ '''Eligible own funds to meet SCR''' represents the quantum of an [[Definition:Insurance carrier | insurer's]] [[Definition:Own funds | own funds]] that regulatory tiering and quantitative limits permit to be counted against the [[Definition:Solvency capital requirement (SCR) | Solvency Capital Requirement]] under the [[Definition:Solvency II | Solvency II]] regime. The SCR is calibrated to ensure that an insurer can withstand a 1-in-200-year adverse event over a one-year horizon, and only capital of sufficient quality and loss-absorbing character may be used to demonstrate compliance. This filtered figure — rather than raw total own funds — is the numerator in the [[Definition:Solvency ratio | solvency ratio]] that regulators, analysts, and markets scrutinize most closely.

🔧 Calculating eligible own funds to meet the SCR requires classifying every own fund item into [[Definition:Tier 1 capital | Tier 1]], [[Definition:Tier 2 capital | Tier 2]], or [[Definition:Tier 3 capital | Tier 3]], and then applying prescribed limits. Tier 1 must compose at least half of the total eligible amount, ensuring the capital base is anchored in permanent, unconditional resources such as ordinary share capital, the [[Definition:Reconciliation reserve | reconciliation reserve]], and qualifying retained earnings. The combined contribution of Tier 2 and Tier 3 is capped, and Tier 3 alone cannot exceed 15% of the SCR. [[Definition:Subordinated debt | Subordinated liabilities]] and [[Definition:Ancillary own funds | ancillary own funds]] may feature in the calculation, but only to the extent they meet specific criteria on subordination, duration, and loss absorption. In group-level calculations, [[Definition:Insurance group supervision | group supervisors]] must also address intra-group transactions, fungibility restrictions, and the availability of own funds held in subsidiaries across different jurisdictions — a layer of complexity that can significantly reduce the eligible figure at the consolidated level.

💡 The practical importance of this metric extends well beyond a compliance checkbox. When an insurer's eligible own funds to meet the SCR dip below the required level, the [[Definition:Insurance regulator | supervisor]] requires a realistic recovery plan within a defined timeframe, and the company may face restrictions on dividend distributions or new business writing. Capital planning teams therefore monitor not just the current ratio but its sensitivity to market movements, [[Definition:Catastrophe risk | catastrophe events]], and changes in the [[Definition:Risk-free interest rate | risk-free rate]] curve. [[Definition:Credit rating agency | Rating agencies]] typically set their own, often more demanding, capital adequacy benchmarks above the regulatory SCR, so the headroom between eligible own funds and the SCR directly influences an insurer's credit rating and cost of capital. Outside Europe, frameworks such as the [[Definition:Risk-based capital (RBC) | NAIC risk-based capital]] system and Japan's [[Definition:Solvency margin ratio | solvency margin ratio]] apply their own tiering and admissibility rules to similar effect, though the specific limits and definitions vary.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Solvency capital requirement (SCR)]]
* [[Definition:Eligible own funds (EOF)]]
* [[Definition:Tier 1 capital]]
* [[Definition:Tier 3 capital]]
* [[Definition:Solvency ratio]]
* [[Definition:Ancillary own funds]]
{{Div col end}}