The solvency margin is a minimum excess on an insurer's assets over its liabilities set by regulators. It can be regarded as similar to capital adequacy requirements for banks. It is essentially a minimum level of the solvency ratio, but regulators usually use a slightly more complex calculation. The current EU requirement is the greatest of:
- 18% of premium written up to €50m plus 16% of premiums above €50m.
- 26% of claims up to €35m plus 23% of claims above €35m.
Some other adjustments are also made. Premiums for high risk classes of business are increased for the purpose of this calculation, an adjustment is made for reinsurance, etc.
This requirement is being replaced by "Solvency II". This is a development that is very similar to the Basel II capital adequacy requirements for banks, as it will mean a move to more complex risk models.
The free asset ratio is net assets adjusted for the solvency margin.