In this article
This note sets out how the Solvency II standard formula SCR is calculated when an insurer has one or more ring-fenced funds, which rules require it and where the method is easy to get wrong. For the background on what makes a fund ring-fenced and how restricted own funds are treated, read ring-fenced funds under Solvency II. For a full numerical walk-through of the notional SCR and the S.25.01 adjustment, read the worked example. The full text of Delegated Regulation (EU) 2015/35 is in the document library, and RFF Tool runs the calculation described here for every fund in one pass.
Purpose
This note explains how the Solvency II standard-formula SCR should be calculated where an insurance undertaking has one or more ring-fenced funds (RFFs). An RFF arises where the profit-participating or similar arrangement restricts the availability or transferability of assets or own-fund items so that they cannot absorb losses elsewhere in the undertaking on a going-concern basis.
Core rule
An insurer with RFFs still has one solo legal-entity SCR. However, where the RFF treatment applies, that SCR is not obtained by a single fully diversified calculation across the undertaking.
Under Delegated Regulation (EU) 2015/35, Articles 216-217, the undertaking must calculate a notional SCR for each material RFF and for the remaining part of the undertaking, as if those were separate undertakings. The undertaking SCR before capital add-on is then the sum of those notional SCRs:
Reason
Article 217 aligns diversification with actual loss-absorbing capacity. Capital restricted to an RFF cannot support losses elsewhere, so diversification between that fund and the remaining part is not recognised.
Legal basis
The standard-formula structure is set out in Directive 2009/138/EC, Articles 103-105. For RFFs, Delegated Regulation (EU) 2015/35, Articles 216-217 require the SCR to be calculated separately for each RFF and the remaining part of the undertaking, with aggregation subject to restrictions on the transferability of own funds. The technical implementation of this treatment is set out in Article 217, unless the undertaking has supervisory approval to apply the alternative approach set out in Directive 2009/138/EC, Article 304.
The amendments introduced by Delegated Regulation (EU) 2026/269 sharpen the Article 216-217 framework by separating the treatment of matching adjustment portfolios from the ring-fenced-fund SCR aggregation method. In particular, a separate notional SCR is no longer required only because assets and liabilities are assigned to a matching adjustment portfolio. The Article 217 notional-SCR aggregation applies where the relevant business constitutes a ring-fenced fund. The amended wording therefore gives Articles 216-217 a cleaner and more direct reading for RFF cases.
Scenario-based stresses
Within bidirectional or scenario-based modules and sub-modules, the stress direction is not selected separately for each RFF and for the remaining part. The relevant scenario is the one that most negatively affects the basic own funds on a net basis of the undertaking as a whole, and that same scenario is then applied consistently to the notional SCR calculations. We refer to EIOPA Q&A 176 for a further description.
Practical implication
A fully diversified undertaking-wide BSCR may be useful as a management view, but it is not the operative Article 217 capital metric where the RFF treatment applies. The operative result is the sum of the notional SCRs. Diversification may still be recognised within each notional calculation unit, but not between material RFFs and the remaining part, unless the undertaking benefits from the approved Article 304 exception.
| Item | Each RFF | Remaining part | Undertaking as a whole |
|---|---|---|---|
| Assets and liabilities | Assets and liabilities of RFF | Assets and liabilities of remaining part | Total Solvency II balance sheet |
| Own funds | Restricted basic own-fund items of RFF | Basic own funds of remaining part | Total own funds, with restriction effects reflected through RFF treatment |
| BSCR | Notional BSCR components used to determine notional SCR | Notional BSCR components used to determine notional SCR | No unique fully diversified Article 217 BSCR output |
| SCR | Notional SCR | Notional SCR | Undertaking SCR equal to sum of notional SCRs |
| Diversification | Within RFF’s own notional calculation | Within remaining part’s own notional calculation | No diversification between RFFs and remaining part, unless undertaking benefits from approved Article 304 exception |
| Scenario selection | Per module/sub-module: same scenario as for undertaking as a whole | Per module/sub-module: same scenario as for undertaking as a whole | Per module/sub-module: scenario selected by reference to most adverse impact on a net basis on basic own funds of undertaking as a whole |
Summary table: Article 217 produces an undertaking SCR, determined as the sum of the notional SCRs for each RFF and for the remaining part of the undertaking, with no diversification between them.
Conclusion
Ring-fencing is not only a disclosure or presentation issue. It changes the operative SCR of the entire undertaking by requiring a notional SCR for each RFF and for the remaining part of the undertaking, with the undertaking SCR determined as their sum. The framework therefore recognises diversification only within each notional component, and not between RFFs and the remaining part of the undertaking, unless the undertaking benefits from an approved Article 304 exception.
For implementation purposes, the decisive control question for each undertaking is therefore not simply whether diversification appears economically plausible, but whether the relevant capital is actually available to absorb losses outside the fund.
