Solvency II
Solvency II: 3 technical terms explained – definition, synonyms and legal basis.
Regular Supervisory Report (RSR)
Synonyms: Bericht an die Aufsichtsbehörde
The Regular Supervisory Report is the confidential Solvency II report an insurer must periodically submit, containing detailed information exclusively for the supervisory authority.
Concept
The Regular Supervisory Report (RSR) is a confidential report, typically submitted in full every three years and in abbreviated form annually, through which a Solvency II insurer provides the competent supervisory authority with detailed information on business activity, governance, risk profile, and capital position.
Distinction from the SFCR
Unlike the public Solvency and Financial Condition Report (SFCR), the RSR is intended exclusively for the supervisory authority and therefore contains significantly more detailed and sensitive information, such as on internal control mechanisms, stress test results, and supervisory-relevant individual risks.
Relevance for Ongoing Supervision
Alongside the quantitative reporting templates (QRTs) and the ORSA report, the RSR is a central component of ongoing supervision (the Supervisory Review Process) under Solvency II, through which the supervisory authority gains a comprehensive picture of an insurer’s risk situation and governance.
Solvency and Financial Condition Report (SFCR)
Synonyms: Bericht über Solvabilität und Finanzlage
The SFCR is an insurer's annually published report under Solvency II that publicly discloses business activity, risk profile, valuation, and capital position.
Concept
The Solvency and Financial Condition Report (SFCR) is a public report that every Solvency II insurer must publish annually, providing information on business activity, risk profile, valuation basis, and capital management.
Content
The SFCR covers in particular information on business performance and results, the governance system, the risk profile (underwriting, market, credit, liquidity, and operational risk), the valuation of assets and liabilities for solvency purposes, and capital management, including coverage of the Solvency Capital Requirement (SCR) and the Minimum Capital Requirement (MCR).
Relevance for Market Discipline
The SFCR primarily serves market discipline by providing the market, analysts, rating agencies, and interested policyholders with publicly available, standardized information on an insurer’s financial condition, thereby complementing the purely supervisory reporting to authorities (the Regular Supervisory Report, RSR).
Internal Models (Interne Modelle)
Synonyms: Interne Modelle, Internal Model
Internal models are risk models developed by an insurer itself and approved by the supervisor for calculating the Solvency Capital Requirement (SCR), designed to reflect the insurer's individual risk profile more precisely than the standard formula.
Concept
Internal models are company-specific risk quantification models that, under Solvency II, may be used as an alternative to the supervisor-prescribed standard formula for calculating the Solvency Capital Requirement (SCR). The aim is a more risk-adequate representation of an insurer’s individual risk profile, particularly where it significantly deviates from the assumptions underlying the standard formula.
Approval Process
The use of an internal model requires an extensive supervisory approval process, in which the supervisory authority reviews the statistical quality, the governance processes (use test, validation cycle, documentation), and the integration of the model into the company’s business management (the “use test”). Partial internal models, which replace only individual risk modules, are also permitted.
Advantages and Disadvantages Compared to the Standard Formula
Internal models frequently allow for a more risk-adequate, and thus often lower, capital requirement than the more generic standard formula, but require substantial investment in modeling and governance infrastructure; larger insurance groups with significant diversification across multiple business lines therefore particularly frequently use internal models to appropriately reflect diversification effects.