1.Each Member State shall require every undertaking whose head office is situated in its territory to establish an adequate solvency margin in respect of its entire business. The solvency margin shall correspond to the assets of the undertaking, free of all foreseeable liabilities, less any intangible items. In particular the following shall be considered: - the paid up share capital or, in the case of a mutual concern, the effective initial fund, - one-half of the share capital or the initial fund which is not yet paid up, once the paid-up part reaches 25 % of this capital or fund, - reserves (statutory reserves and free reserves) not corresponding to underwriting liabilities, - any carry-forward of profits, - in the case of a mutual or mutual-type association with variable contributions, any claim which it has against its members by way of a call for supplementary contribution, within the financial year, up to one-half of the difference between the maximum contributions and the contributions actually called in, and subject to an over-riding limit of 50 % of the margin, - at the request of, and upon proof being shown by the undertaking, and with the agreement of the supervisory authorities of each other Member State where it carries on its business, any hidden reserves resulting from under-estimation of assets or over-estimation of liabilities in the balance sheet, in so far as such hidden reserves are not of an exceptional nature. Over-estimation of technical reserves shall be determined in relation to their amount calculated by the undertaking in conformity to national regulations ; however, pending further coordination of technical reserves, an amount equivalent to 75 % of the difference between the amount of the reserve for outstanding risks calculated at a flat rate by the undertaking by application of a minimum percentage in relation to premiums and the amount that would have been obtained by calculating the reserve contract by contract where the national law gives an option between the two methods, can be taken into account in the solvency margin up to 20 %.
2.The solvency margin shall be determined on the basis either of the annual amount of premiums or contributions, or of the average burden of claims for the past three financial years. In the case, however, of undertakings which essentially underwrite only one or more of the risks of storm, hail, frost, the last seven years shall be taken as the period of reference for the average burden of claims.
3.Subject to the provisions of Article 17, the amount of the solvency margin shall be equal to the higher of the following two results: first result (premium basis): - the premiums or contributions (inclusive of charges ancillary to premiums or contributions) due in respect of all direct business in the last financial year for 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 there 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 portion extending up to 10 million units of account, the second comprising the excess ; 18 % and 16 % of these portions respectively shall be calculated and added together. The first 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 undertaking after deduction of transfers for reinsurance and the gross amount of claims ; this ratio may in no case be less than 50 %. Second result (claims basis): - the amounts of claims paid in respect of direct business (without any deduction of claims borne by reinsurers and retrocessionaires) in the periods specified in (2) shall be aggregated, - to this aggregate there shall be added the amount of claims paid in respect of reinsurances or retrocessions accepted during the same periods, - to this sum there shall be added the amount of provisions or reserves for outstanding claims established at the end of the last financial year both for direct business and for reinsurance acceptances, - from this sum there shall be deducted the amount of claims paid during the periods specified in (2), - from the sum then remaining, there shall be deducted the amount of provisions or reserves for outstanding claims established at the commencement of the second financial year preceding the last financial year for which there are accounts, both for direct business and for reinsurance acceptances. One-third, or one-seventh, of the amount so obtained, according to the period of reference established in (2), shall be divided into two portions, the first extending up to seven million units of account and the second comprising the excess ; 26 % and 23 % of these portions respectively shall be calculated and added together. The second result shall be obtained by multiplying the sum so obtained by the ratio existing in respect of the last financial year between the amount of claims remaining to be borne by the business after transfers for reinsurance and the gross amount of claims ; this ratio may in no case be less than 50 %.
4.The fractions applicable to the portions referred to in (3) shall each be reduced to a third in the case of health insurance practised on a similar technical basis to that of life assurance, if - the premiums paid are calculated on the basis of sickness tables according to the mathematical method applied in insurance, - a reserve is set up for increasing age, - an additional premium is collected in order to set up a safety margin of an appropriate amount, - the insurer may only cancel the contract before the end of the third year of insurance at the latest, - the contract provides for the possibility of increasing premiums or reducing payments even for current contracts.
5.In the case of Lloyd's, the calculation of the first result in respect of premiums, referred to in paragraph 3, shall be made on the basis of net premiums, which shall be multiplied by a flat-rate percentage fixed annually by the internal auditor. 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 authorities of the countries where Lloyd's is established.