Pillar I: Capital Requirements
This pillar covers insurance balance sheets, which are based on liabilities, assets and an amount of capital needed to ensure that claims can be paid with a high likelihood. Pillar 1 of Solvency II requires businesses to calculate their Solvency Capital Requirement (SCR), using either the Standard Formula (determined by EIOPA, the European insurance regulator) or a (Partial) Internal Model (calibrated by the insurance company and approved by the insurers' regulator). The Minimum Capital Requirement (MCR) must also be calculated. This is the figure below which the regulator would intervene to protect policyholders.
Pillar II: Governance & Supervision
This pillar covers the structure and management of insurance businesses and how they are governed. It requires insurers to identify, measure, monitor, manage and report risks they are exposed to. Insurers must put risk management at the heart of decision-making, and are required to conduct an Own Risk and Solvency Assessment (ORSA).
Pillar III: Reporting & Disclosure
Involves how aspects of Solvency II are reported to supervisors and the external stakeholders. This pillar covers the supervisory reporting and public disclosure of financial and other information by insurance companies.