Structural Blocks

Solvency II – Standard Model

The standard model of the new solvency regime, under which the target capital level shall be set, is based on the following principles:

  • the  economic valuation of the commitments made will be based on best estimates of future cash flows (best estimate), without taking into account the safety margins, but including discounting
  • the valuation of embedded options and guarantees should be based on market value of those risks.

These rules will have to be met both in the standard model, as well as the internal models. The standard model will be as simple as possible and as complex as far as it is necessary to properly reflect the significant risks of insurance companies. The rules for its construction are described in thematic groups, the so-called structural blocks (Building Blocks).

Detailed rules for the construction of the standard model and internal models

Structure Block # 1: The general approach to the company’s balance in accordance with the principles of economic valuation of assets and liabilities of an insurance company
Structure Block # 2: The economic valuation of assets and liabilities should be based on the best estimate of future cash flows or the market value.

Structure Block # 3: The safety margin, the total capital requirement and the capital required for solvency purposes.

Structure Block # 4: The solvency level assessment.

Structure Block # 5: Measures of risk and time horizon.

Structure Block # 6: Risk classification.

Structure Block # 7: Risk aggregation.

Structure Block # 8: Risk reduction methods.

Structure Block # 9: Capital groups.