Pillar 1 considers the quantitative requirements of the system, including the calculation of technical provisions, the rules relating to the calculation of the solvency capital requirements and investment management.

Technical provisions
For life assurance technical provisions will be calculated on a policy-by-policy basis as the present value of expected future cash flows with an explicit margin for risk. The discounting of cash flows will be carried out using an appropriate term structure of interest rates.

For non-life, premium provisions are likely to be merged, i.e. the unexpired risks provision with the current unearned premium reserve acting as floor. For some lines of business, the equalisation reserves will probably still be permitted but they will be considered as capital for the purpose of meeting the Solvency Capital Requirements (SCR).

Capital
Quantitative requirements will depend on the final shape of the rules for Solvency II, but the consultation process foresees two levels of capital requirements. The first level covers the Minimum Capital Requirements (MCR). The second concerns SCR.

The MCR is not necessarily the correct level of capital that companies should hold, but it will act as a safety net. The SCR will be closely aligned to the risks the company faces providing policyholders reasonable assurance that payments will be met as they fall due. The Committee of European Insurance and Occupational Pensions Supervisors' (CEIOPS) working hypothesis is that the SCR will be consistent with a 99.5% confidence level over a one-year timeframe.

When MCR and SCR are assessed against actual available capital, the comparison leads to three potential alternatives:

• If the available capital is more than the SCR, the insurance company is sufficiently capitalised.
• If the available capital lies between the SCR and the MCR, this is an early indicator to the supervisor and the insurance company that action needs to be taken.
• If the available capital is less than the MCR, the insurance company is technically insolvent.

Investment
Quantitative limits will apply to address concentration and liquidity risk. Assets covering the MCR and SCR are likely to be subject to the same rules as assets covering the technical provisions. The current Solvency I list will be used as a starting point. Any breach of quantitative limits on investments will be permitted if previously agreed by the regulator.

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