Value-at-Risk (VaR) is a commonly used measure in financial services to assess the risk associated with a portfolio of assets and liabilities. VaR answers the question how much money would be lost, if events develop in an adverse and unexpected way. More precisely, Value-at-Risk (VaR) measures the worst expected loss under normal conditions over a specific time interval at a given confidence level. For example, if VaR is measured over a one-year period at a confidence level of 99.5% then this corresponds to the worst loss one would expect to occur in a single year over the next two hundred years.
A reason for two capital requirements is to establish a better early warning mechanism (allows more time for supervisory intervention).
If an insurer's available resources fall below the SCR, then supervisors must act to restore the insurer’s finances back into the level of the SCR as soon as possible. But if the financial situation of the insurer continues to deteriorate, then the level of supervisory intervention will be progressively intensified. The aim of this 'supervisory ladder' of intervention is to capture any ailing insurers before a serious threat to policyholders' interests.
If, despite supervisory intervention, the available resources of the insurer fall below the MCR, then 'ultimate supervisory action' will be triggered i.e. the insurer's liabilities will be transferred to another insurer and the license of the insurer will be withdrawn or the insurer will be closed to new business and its in-force business will be liquidated.
European Standard Formula is the new basic calculation method that insurers can use to determine their solvency capital requirement (SCR). The final calibration will be included in an implementing measure that will contain the technical detail needed for insurers to run the formula in practice. This implementing measure will be agreed after the Framework Directive has been finalized, following a careful analysis of the results of QIS 3 and QIS 4, and after consultation with the co-legislators and stakeholders. It is expected that the final formula will be known in the second half of 2009.