Which of the following is true regarding the Minimum Capital Requirement (“MCR”) for insurance companies under Solvency 2?

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BlackTom AI · Accepted Answer

Delving into the Minimum Capital Requirement (MCR) under Solvency II, we need to evaluate how the MCR is constructed and what constraints apply to it.
Option 1: 'It targets an insurer’s 85% ES over a one year horizon.' This statement confuses MCR with a specific risk measure or confidence level. The 85% expected shortfall (ES) metric is not how the MCR is defined or targeted; MCR is not expressed as a single ES value. Therefore, this option misstates the fundamental basis of MCR.
Option 2: 'It has a ceiling and floor determined by the insurer’s Solvency Capital Requirement (“SCR”).' This is consistent with the Solvency II framework, where the MCR is bounded by a floor and a ceiling that are linked to the SCR. In practical terms, the MCR cannot be below a percentage of the SCR and cannot exceed another percentage of the SCR, providing a safety band anchored to the insurer’s SCR. This description aligns with regulatory design intended to prevent capital levels from dropping too low or rising too high relative to overall risk appetite.
Option 3: 'There are no regulatory consequences if an insurer’s actual capital falls below the MCR.' This is incorrect because falling below the MCR triggers supervisory actions and potential intervention. The MCR is specifically the trigger for regulatory concern, and breaching it carries consequences such as requiring corrective action.
Option 4: 'It can be calculated using an internal model if approved by the regulator.' While the SCR can be calculated via an internal model with regulator approval, the MCR is not typically calculated using an internal-model approach that is separately approved; it is defined by its own floor/ceiling rules relative to SCR and standard formula. Therefore this statement is misleading about the calculation approach for MCR.
In summary, the only statement that correctly reflects the relationship between MCR and SCR under Solvency II is Option 2, which describes the floor and ceiling being determined in relation to the insurer’s SCR. The other options either misstate the basis of MCR, imply no regulatory consequences which is false, or mischaracterize the calculation methodology for MCR.

ERMCPS5250_006_2025_1 - EXTERNAL STAKEHOLDER REQUIREMENTS Quiz 4- Solvency 2/ORSA/SEC ERM Requirements

Which of the following is true regarding the Minimum Capital Requirement (“MCR”) for insurance companies under Solvency 2?

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