Each Member State shall require of every assurance undertaking whose head office is situated in its territory an adequate solvency margin in respect of its entire business.

The solvency margin shall consist of:

1. 1.

   the assets of the assurance undertaking free of any foreseeable liabilities, less any intangible items. In particular the following shall be included:

   • the paid-up share capital or, in the case of a mutual assurance undertaking, the effective initial fund plus any members' accounts which meet all the following criteria:

     1. (a)

        the memorandum and articles of association must stipulate that payments may be made from these accounts to members only in so far as this does not cause the solvency margin to fall below the required level, or, after the dissolution of the undertaking, if all the undertaking's other debts have been settled;

     2. (b)

        the memorandum and articles of association must stipulate, with respect to any such payments for reasons other than the individual termination of membership, that the competent authorities must be notified at least one month in advance and can prohibit the payment within that period;

     3. (c)

        the relevant provisions of the memorandum and articles of association may be amended only after the competent authorities have declared that they have no objection to the amendment, without prejudice to the criteria stated in (a) and (b),

   • one half of the unpaid share capital or initial fund, once the paid-up part amounts to 25 % of that share capital or fund,

   • reserves (statutory reserves and free reserves) not corresponding to underwriting liabilities,

   • any profits brought forward,

   • cumulative preferential share capital and subordinated loan capital may be included but, if so, only up to 50 % of the margin, no more than 25 % of which shall consist of subordinated loans with a fixed maturity, or fixed-term cumulative preferential share capital, if the following minimum criteria are met:

     1. (a)

        in the event of the bankruptcy or liquidation of the assurance undertaking, binding agreements must exist under which the subordinated loan capital or preferential share capital ranks after the claims of all other creditors and is not to be repaid until all other debts outstanding at the time have been settled.

     Subordinated loan capital must also fulfil the following conditions:

     1. (b)

        only fully paid-up funds may be taken into account;

     2. (c)

        for loans with a fixed maturity, the original maturity must be at least five years. No later than one year before the repayment date, the assurance undertaking must submit to the competent authorities for their approval a plan showing how the solvency margin will be kept at or brought to the required level at maturity, unless the extent to which the loan may rank as a component of the solvency margin is gradually reduced during at least the last five years before the repayment date. The competent authorities may authorise the early repayment of such loans provided application is made by the issuing assurance undertaking and its solvency margin will not fall below the required level;

     3. (d)

        loans the maturity of which is not fixed must be repayable only subject to five years' notice unless the loans are no longer considered as a component of the solvency margin or unless the prior consent of the competent authorities is specifically required for early repayment. In the latter event the assurance undertaking must notify the competent authorities at least six months before the date of the proposed repayment, specifying the actual and required solvency margin both before and after that repayment. The competent authorities shall authorise repayment only if the assurance undertaking's solvency margin will not fall below the required level;

     4. (e)

        the loan agreement must not include any clause providing that in specified circumstances, other than the winding-up of the assurance undertaking, the debt will become repayable before the agreed repayment dates;

     5. (f)

        the loan agreement may be amended only after the competent authorities have declared that they have no objection to the amendment,

   • securities with no specified maturity date and other instruments that fulfil the following conditions, including cumulative preferential shares other than those mentioned in the fifth indent, up to 50 % of the margin for the total of such securities and the subordinated loan capital referred to in the fifth indent:

     1. (a)

        they may not be repaid on the initiative of the bearer or without the prior consent of the competent authority;

     2. (b)

        the contract of issue must enable the assurance undertaking to defer the payment of interest on the loan;

     3. (c)

        the lender's claims on the assurance undertaking must rank entirely after those of all non-subordinated creditors;

     4. (d)

        the documents governing the issue of the securities must provide for the loss-absorption capacity of the debt and unpaid interest, while enabling the assurance undertaking to continue its business;

     5. (e)

        only fully paid-up amounts may be taken into account.

2. 2.

   in so far as authorised under national law, profit reserves appearing in the balance sheet where they may be used to cover any losses which may arise and where they have not been made available for distribution to policy holders;

3. 3.

   upon application, with supporting evidence, by the undertaking to the competent authority of the Member State in the territory of which its head office is situated and with the agreement of that authority:

   1. (a)

      an amount equal to 50 % of the undertaking's future profits; the amount of the future profits shall be obtained by multiplying the estimated annual profit by a factor which represents the average period left to run on policies; the factor used may not exceed 10; the estimated annual profit shall be the arithmetical average of the profits made over the last five years in the activities listed in Article 2 of this Directive.

      The bases for calculating the factor by which the estimated annual profit is to be multiplied and the items comprising the profits made shall be defined by common agreement by the competent authorities of the Member States in collaboration with the Commission. Pending such agreement, those items shall be determined in accordance with the laws of the home Member State.

      When the competent authorities have defined the concept of profits made, the Commission shall submit proposals for the harmonisation of this concept by means of a Directive on the harmonisation of the annual accounts of insurance undertakings and providing for the coordination set out in Article 1(2) of Directive 78/660/EEC;

   2. (b)

      where Zillmerising is not practised or where, if practised, it is less than the loading for acquisition costs included in the premium, the difference between a non-Zillmerised or partially Zillmerised mathematical provision and a mathematical provision Zillmerised at a rate equal to the loading for acquisition costs included in the premium; this figure may not, however, exceed 3,5 % of the sum of the differences between the relevant capital sums of life assurance activities and the mathematical provisions for all policies for which Zillmerising is possible; the difference shall be reduced by the amount of any undepreciated acquisition costs entered as an asset;

   3. (c)

      where approval is given by the competent authorities of the Member States concerned in which the assurance undertaking is carrying on its activities any hidden reserves resulting from the underestimation of assets and overestimation of liabilities other than mathematical provisions in so far as such hidden reserves are not of an exceptional nature.

Subject to section C, the minimum solvency margin shall be determined as shown below according to the classes of assurance underwritten.

1. (a)

   For the kinds of assurance referred to in Article 2(1)(a) and (b) of this Directive other than assurance linked to investment funds and for the operations referred to in Article 2(3) of this Directive, it must be equal to the sum of the following two results:

   • first result:

     a 4 % fraction of the mathematical provisions relating to direct business gross of reinsurance cessions and to reinsurance acceptances shall be multiplied by the ratio, for the last financial year, of the total mathematical provisions net of reinsurance cessions to the gross total mathematical provisions as specified above; that ratio may in no case be less than 85 %,

   • second result:

     • for policies on which the capital at risk is not a negative figure, a 0,3 % fraction of such capital underwritten by the assurance undertaking shall be multiplied by the ratio, for the last financial year, of the total capital at risk retained as the undertaking's liability after reinsurance cessions and retrocessions to the total capital at risk gross of reinsurance; that ratio may in no case be less than 50 %.

     • For temporary assurance on death of a maximum term of three years the above fraction shall be 0,1 %; for such assurance of a term of more than three years but not more than five years the above fraction shall be 0,15 %.

2. (b)

   For the supplementary insurance referred to in Article 2(1)(c) of this Directive, it shall be equal to the result of the following calculation:

   • the premiums or contributions (inclusive of charges ancillary to premiums or contributions) due in respect of direct business in the last financial year in respect of all financial years shall be aggregated,

   • to this aggregate there shall be added the amount of premiums accepted for all reinsurance in the last financial year,

   • from this sum shall then be deducted the total amount of premiums or contributions cancelled in the last financial year as well as the total amount of taxes and levies pertaining to the premiums or contributions entering into the aggregate.

   The amount so obtained shall be divided into two portions, the first extending up to EUR 10 million and the second comprising the excess; 18 % and 16 % of these portions respectively shall be calculated and added together.

   The result shall be obtained by multiplying the sum so calculated by the ratio existing in respect of the last financial year between the amount of claims remaining to be borne by the assurance undertaking after deduction of transfers for reinsurance and the gross amount of claims; this ratio may in no case be less than 50 %.

   In the case of the association of underwriters known as Lloyd's, the calculation of the solvency margin shall be made on the basis of net premiums, which shall be multiplied by flat-rate percentage fixed annually by the competent authority of the head office Member State. This flat-rate percentage must be calculated on the basis of the most recent statistical data on commissions paid. The details together with the relevant calculations shall be sent to the competent authorities of the countries in whose territory Lloyd's is established.

3. (c)

   For permanent health insurance not subject to cancellation referred to in Article 2(1)(d) of this Directive, and for capital redemption operations referred to in Article 2(2)(b) thereof, it shall be equal to a 4 % fraction of the mathematical provisions calculated in compliance with the conditions set out in the first result in (a) of this section.

4. (d)

   For tontines, referred to in Article 2(2)(a) of this Directive, it shall be equal to 1 % of their assets.

5. (e)

   For assurance covered by Article 2(1)(a) and (b) of this Directive linked to investment funds and for the operations referred to in Article 2(2)(c), (d) and (e) of this Directive it shall be equal to:

   • a 4 % fraction of the mathematical provisions, calculated in compliance with the conditions set out in the first result in (a) of this section in so far as the assurance undertaking bears an investment risk, and a 1 % fraction of the provisions calculated in the same way, in so far as the undertaking bears no investment risk provided that the term of the contract exceeds five years and the allocation to cover management expenses set out in the contract is fixed for a period exceeding five years, plus

   • a 0,3 % fraction of the capital at risk calculated in compliance with the conditions set out in the first subparagraph of the second result of (a) of this section in so far as the assurance undertaking covers a death risk.