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Capital Provision
Capital model of InsurAce.io
InsurAce's capital model refers to the EIOPA's Solvency II, the prudential regime for insurance and reinsurance undertakings in the EU. It sets out requirements applicable to insurance and reinsurance companies to ensure the adequate protection of policyholders and beneficiaries.
At the core of the regulatory framework, Solvency II is an economic risk-based approach that should assess the "overall solvency" of insurance and reinsurance undertakings through quantitative and qualitative measures. Under Solvency II, the undertaking’s solvency requirements are determined based on their risk profiles and how such risks are managed, providing the right incentives for sound risk management practices and securing enhanced transparency.
There are different tiers of capital requirements under Solvency II, of which the Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR) are the two critical criteria. The SCR is the capital required to ensure that the insurance company will be able to meet its obligations over the next 12 months with a probability of at least 99.5%, while MCR represents the threshold to correspond to an 85% probability of adequacy over 12 months and is bound between 25% and 45% of the SCR. For supervisory purposes, the SCR and MCR can be regarded as "soft" and "hard" floors.
EIOPA’s Solvency II Capital Model
Capital Pool
The capital pool is the cornerstone that is to lay the foundation of insurance capabilities. In InsurAce.io, the capital pool is built by the funds in the mining pools and the investment pool.
For details of mining and investment, please refer to the page below:
The investment portal is still under development. It will be launched soon. Please stay tuned.
Solvency Capital Requirement (SCR)
The SCR is the amount of funds that are required to hold to ensure that the insurance company can meet its obligations to policyholders over the next 12 months with a 99.5% probability, which limits the possibility of falling into financial ruin to less than once in 200 cases.
In InsurAce.io, we use SCR as our capital management standard to calculate the minimum required amount of funds set aside to pay all the potential claims considering all quantifiable risks.
SCR is calculated with the following factors/inputs:
- All the active covers
- All the outstanding claims
- The potential incurred but not reported claims
- The market currency shock risk
- The non-life premium & reserve, lapse and catastrophe risks
- The potential operational risk
The SCR calculation runs on a daily basis. We will review and update it to on-chain only if there is a noticeable change in the required capital requirement.
Solvency Capital Requirement Ratio (SCR%)
The SCR% is the ratio of capital that the insurance company has available to support its SCR. It is also known as Capital to Risk Assets Ratio which measures the ratio of a company's capital to its risk.
SCR% is calculated by the following formula:
SCR% = Capital Pool Size / SCR👉 A high ratio means the insurance company is financially strong with sufficient available funds to cover potential claims and other risks so the company is less likely to be insolvent
👉 The lowest acceptable ratio is 100%.
Capital Efficiency Ratio (CER%)
The Capital Efficiency Ratio (CER%) is the ratio of output per amount of capital dedicated to the operation of a business or a product line. This ratio serves as a way to measure a company's short-term or current success in deploying capital.
At InsurAce.io, CER% is calculated by the following formula:
CER% = Active Cover Amount / Capital Pool Size👉 A high ratio means the insurance company is increasing the productivity of its assets to generate income.
👉 The desirable ratio should be between 100% and 300% to have high productivity and with moderate risk exposure.
👉 The real-time value of Capital Pool Size, Active Cover Amount and CER% can be found on our insurance data page.
Last modified 2mo ago