Solvency ratio, SCR and MCR: what each means, how the MCR corridor works and what a breach triggers

Solvency II gives in-scope EU insurance and reinsurance undertakings two capital requirements. The SCR is calibrated to the 99.5% Value-at-Risk of basic own funds over one year, often described as a one-in-200-year risk. The MCR is a separate minimum. A breach triggers short-term supervisory action and may lead to withdrawal of authorisation if not remedied. This article explains the two ratios, works the MCR formula and corridor through the undertaking from our SCR post, and shows what follows a breach and where the numbers appear in S.28.01 and S.23.01. It is written for anyone evaluating SCR Tool, which calculates the SCR and the MCR from the same inputs.

Two requirements, two ratios

Article 100 of Directive 2009/138/EC requires an undertaking to hold eligible own funds covering the Solvency Capital Requirement, and Article 101 calibrates it to the Value-at-Risk of basic own funds at a 99.5% confidence level over one year. Our post on how to calculate the SCR under the standard formula builds that number module by module.

Article 128 requires eligible basic own funds to cover the MCR. Article 129(1)(c) calibrates its linear function to an 85% one-year Value-at-Risk of basic own funds. The SCR ratio is eligible own funds divided by the SCR, and the MCR ratio is eligible basic own funds to meet the MCR divided by the MCR.

What is a healthy solvency ratio?

The legal minimum is 100% coverage of each requirement and there is no single EU-wide target above that. The board sets its own target under its risk appetite. EIOPA’s June 2026 Financial Stability Report gives end-2025 median solo SCR ratios of 247.0% for life, 213.7% for non-life and 219.0% for composite undertakings.

The own funds behind the ratios differ. Under Article 82 of Delegated Regulation (EU) 2015/35, eligible SCR cover must include at least $0.50\times\mathrm{SCR}$ in tier 1; tier 3 is below $0.15\times\mathrm{SCR}$, and tiers 2 and 3 together cannot exceed $0.50\times\mathrm{SCR}$. MCR cover uses eligible basic own funds only: at least $0.80\times\mathrm{MCR}$ in tier 1, at most $0.20\times\mathrm{MCR}$ in tier 2, and none in tier 3.

The MCR formula: linear function, corridor and absolute floor

Article 129(2) defines a linear function of a set or subset of technical provisions, written premiums, capital at risk, deferred tax and administrative expenses, measured net of reinsurance. Article 129(3) places the combined MCR between 25% and 45% of the SCR, including any capital add-on, without prejudice to the absolute euro floor in Article 129(1)(d). Article 248 of the Delegated Regulation applies that floor after the corridor:

$\mathrm{MCR}_{\mathrm{linear}}$ is a non-life component plus a life component. Under Article 250, the non-life component sums the prescribed factors applied to net technical provisions without risk margin and net written premiums for the 16 non-life and health insurance and reinsurance segments. The inputs are floored at zero. The factors are in Annex XIX, replaced from 30 January 2027 by Commission Delegated Regulation (EU) 2026/269. The three segment factors used in the example below are unchanged. Article 251 prescribes five life terms and the negative factor for future discretionary benefits reflects their loss-absorbing treatment:

Here, $\alpha_s$ and $\beta_s$ are the Annex XIX factors, $\mathrm{TP}^{\mathrm{net}}_s$ excludes the risk margin, and $\mathrm{WP}^{\mathrm{net}}_s$ covers the last twelve months. For life, the first TP term is for qualifying guaranteed benefits under profit-participating obligations, the second for future discretionary benefits, the third for index-linked and unit-linked obligations, and the fourth for other life and reinsurance obligations. These TP inputs exclude the risk margin, are net of eligible reinsurance and special-purpose-vehicle recoverables, and are floored at zero. $\mathrm{CaR}$ is the contract-level measure defined in Article 251, net of recoverables.

The absolute floor after the 2021 indexation

Article 300 of the Directive revises the euro amounts every five years in line with the Harmonised Index of Consumer Prices. The first revision, Commission notice 2021/C 423/12, had to be applied by 19 October 2022. The 2021 notice set these amounts so check for any subsequent notice before publication:

Note that Directive (EU) 2025/2 does not amend Article 129 or Article 300.

A worked example: from the SCR post to the MCR

The SCR post ended with an SCR of 66.85 million and eligible own funds of 120 million, a solvency ratio of about 180%. That undertaking carries both a life and a non-life module, so as a direct insurer it would be a composite filing S.28.02. We treat it as a reinsurer, which files S.28.01 with an absolute floor of EUR 3.9 million. All figures are in millions.

Step 1 is the non-life component, with three segments:

Step 2 uses the Article 251 life TP buckets, in millions: qualifying guaranteed benefits under profit-participating obligations, 120; future discretionary benefits, 15; unit-linked business, 100; other life business, 30; and net capital at risk, 1,000. TP inputs exclude the risk margin and are net of eligible recoverables.

Step 3 adds the two:

Step 4 applies the corridor. The floor is $0.25 \times 66.85 = 16.71$ and the cap is $0.45 \times 66.85 = 30.08$. The linear MCR of 20.58 lies between them:

Step 5 applies the absolute floor:

The MCR is 20.58 million. Step 6 is the ratio. If all 120 million of own funds are tier 1:

When the cap or the floor takes over

Had the linear MCR come out at 35, the corridor cap would have applied: $\min(\max(35, 16.71), 30.08) = 30.08$. Had it come out at 12, the corridor floor would have applied at 16.71. This can occur when net inputs are low.

A small non-life insurer that writes no business in classes 10-15, with an SCR of 6 million and a linear MCR of 1.2 million, gets $0.25 \times 6 = 1.5$ from the corridor, but the EUR 2.7 million absolute floor overrides it. Our post on ring-fenced funds under Solvency II covers a different way the two ratios can part company.

What happens on a breach

Directive (EU) 2025/2 replaces Article 139 from 30 January 2027. The one-month and three-month clocks stay, but they also start on the observation of a risk of non-compliance, and the home supervisor must consider restricting the free disposal of assets if winding-up proceedings have not been opened within two months of being informed.

Which templates carry the SCR and the MCR

S.25.01 reports the SCR annually: R0200 is the SCR excluding capital add-on, R0210 the add-on and R0220 the SCR, which is the reference for the corridor.

S.28.01 reports the MCR for an undertaking with only life or only non-life activity, and for reinsurers. The segment inputs go into rows R0020 to R0170 for non-life and R0210 to R0250 for life, the two components into C0010/R0010 (14.89) and C0040/R0200 (5.69), and the overall calculation into column C0070: R0300 linear MCR 20.58, R0310 SCR 66.85, R0320 MCR cap 30.08, R0330 MCR floor 16.71, R0340 combined MCR 20.58, R0350 absolute floor 3.9 and R0400 Minimum Capital Requirement 20.58.

S.28.02 is the composite version. It runs the overall calculation in C0130 rows R0300 to R0400, then repeats the corridor on notional figures in rows R0500 to R0560, non-life in C0140 and life in C0150, because Article 74(3) of the Directive requires a composite to cover a notional MCR for each activity separately.

S.23.01 holds the ratios: R0540 and R0550 the eligible own funds to meet the SCR and the MCR after the tier limits, R0580 the SCR, R0600 the MCR, R0620 the ratio to the SCR and R0640 the ratio to the MCR, which in the example print 1.7951 and 5.8309. Which variant of each template is quarterly and which annual is in our list of Solvency II QRTs.

How the numbers move quarter to quarter

The SCR is calculated at least once a year under Article 102 and recalculated without delay if the risk profile deviates significantly from the assumptions behind the last calculation. The MCR is calculated at least quarterly under Article 129(4), using the latest SCR. Q new SCR calculation is not required solely for the corridor. In a normal year the R0320 and R0330 bounds stay fixed while the linear MCR moves with the TP, premiums and capital-at-risk inputs. The final MCR remains the greater of the combined MCR and the absolute floor.

Up to and including annual 2026, quarterly reporting includes S.23.01 and S.28.01 or S.28.02, due five weeks after quarter-end under Article 312. EIOPA’s 2.10.0 taxonomy is designated for Q1 2027. Under its proposed amended reporting ITS, S.28.01 and S.28.02 would become annual and the quarterly MCR would be carried in S.23.01 row R0600. Confirm Commission adoption before treating this as binding.

Where this lands in the software

SCR Tool calculates the SCR and the MCR from the same data. Liability data can arrive directly from TP Tool for the underwriting modules, and the same net technical provisions by segment feed the linear MCR. Written premiums and capital-at-risk can come from databases, Excel or CSV files. The overview shows the linear components, the 25% and 45% bounds, the absolute floor and the resulting MCR next to the SCR, and you can drill into any component with its formula visible. Results are presented in the QRT layout, so S.28.01, S.28.02 and the S.23.01 ratios come out as reported.