The following Glossary of terms was published in a paper called "Solvency II: a new framework for prudential regulation of insurance in the EU" .
© Crown copyright 2006

Asset Liability Management the process of analysing the interaction between the risks to assets and its liabilities. One example in insurance is duration risk which arises where assets and liabilities have different maturities.
Australian Prudential Regulatory Authority (APRA) the prudential regulator of the Australian financial services industry.
Basel II (or new Basel Accord) the Basel Committee’s update of the existing capital framework for the banking sector.
Basel Committee for Banking Supervision (Basel Committee) a forum for  cooperation on banking supervisory matters that also sets standards for banking supervision.
Best estimate the expected value or probability-weighted average of a random variable.
Capital Requirements Directive (CRD) the amendments to EU directives implementing Basel II for credit institutions and investment business (Banking Coordination Directive, 2000/12/EC, and Capital Adequacy Directive, 93/6/EEC).
Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) one of the Lamfalussy ‘level 3’ committees which develops guidance to promote consistent application of Lamfalussy directives. The other level 3 committees are the Committee of European Banking Supervisors (CEBS) and the Committee of European Securities Regulators (CESR). CEIOPS also provides technical advice to the European Commission on the development of the Solvency II framework and other policy issues. 
Cost of capital approach a method for estimating the value of insurance liabilities on a market consistent basis in the absence of a market price. The liability is valued at the best estimate plus a risk margin which is assumed to be the cost to the insurer of bearing the risk in the liability. That cost is the product of the amount of capital required (e.g. to meet regulatory requirements) and its
price.
Diversification benefits the reduction in the level of capital required by an insurer to achieve a given level of security (e.g. credit rating) compared with the level which would be needed if all risks were assumed to be perfectly correlated. 
Economic capital the amount of capital that an insurer would actually require to bear the risks it takes on in the absence of regulatory requirements. Economic capital is a function of the targeted level of security and the insurer’s capacity to assess, mitigate and manage risks.
European Insurance and Occupational Pensions Committee (EIOPC) the level 2 Lamfalussy committee of Member States chaired by the EU Commission. EIOPC will develop the level 2 implementing measures within the scope of the Solvency II framework directive (level 1). It also advises the Commission on insurance matters more generally.
Eligible capital the forms of capital which firms can rely on to meet the solvency requirements.
Enhanced Capital Requirement (ECR) a capital requirement imposed by the FSA on UK insurers (however, for non-life insurance firms the ECR is not currently a ‘hard’ capital requirement). The ECR is more risk sensitive than regulatory capital in Solvency I and in particular reflects asset risk. 
Fair (market consistent) value the price at which transactions would occur at arms’ length between willing parties
Financial Services Action Plan (FSAP) the EU’s legislative framework for developing the Single Market in financial services.
Financial Services Authority (FSA) the UK’s integrated regulator of financial services.
Financial Conglomerates Directive (FCD) the directive which makes provision for group-wide supervision of companies which have subsidiaries operating in more than one financial sector (2002/87/EC).
Hedgeable risk a risk that can be hedged and thus priced through purchase of a financial instrument, for example a derivative.
Individual Capital Adequacy Standards (ICAS) the FSA’s framework that UK insurance firms use to assess what level and quality of capital they need to maintain.
Individual Capital Guidance (ICG) the FSA’s guidance about the minimum quality and level of capital that a firm needs to hold, which is provided following the firm’s ICAS submission.
Insurance Groups Directive (IGD) the EU Directive which applies Solvency I regulatory capital requirements to insurance groups and makes provisions for group supervision (98/78/EC).
Internal Model a model which represents the (material) assets and liabilities on an insurer’s balance sheet and can be used to forecast the impact on solvency of changes in relevant variables e.g. financial market prices, adverse deviation in underwriting results etc. 
International Accounting Standards Board (IASB) independent accounting standard-setter based in London. The IASB formulates accounting standards known as International Financial Reporting Standards.
International Monetary Fund (IMF) an international organization established to promote international monetary cooperation; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment.
International Association of Insurance Supervisors (IAIS) represents insurance regulators and supervisors worldwide; the IAIS issues global insurance principles and standards.
International Financial Reporting Standards (IFRS) accounting standards set by the IASB; listed EU companies have been required to produce their accounts using IFRS since 2005.
Lamfalussy arrangements the arrangements designed to enable the EU to develop and update financial services legislation more quickly and easily. Under this approach, directives set out high-level principles and define the scope for implementing measures. The latter are decided by the Commission in consultation with Member States in the level 2 committees and taking into
account technical advice from the level 3 supervisors’ committee.
Minimum Capital Requirement (MCR) the level of capital required by Solvency II below which there would be an unacceptable risk to policyholders and which triggers “ultimate” supervisory intervention requiring the firm to restore rapidly the level of solvency.
Minimum Guarantee Fund (MGF) the minimum amount of capital required under Solvency I. For most insurers the greater of one third of the Regulatory Minimum Margin or €4million.
Pillars 1, 2, 3 the three-pillar structure which will be applied to Solvency II, derived from the Basel II reforms to banking supervision. Pillar 1 will define a quantitative standard for technical provisions and the regulatory capital requirements; Pillar 2 will define the supervisory review process and Pillar 3 the regulatory disclosures firms will be required to make publicly and to supervisors.
Prudent Person a principle which guides asset management by requiring the manager to invest as a prudent person would do. 
Prudential margin a margin added to the best estimate of an insurance liability which to reflect the uncertainties in the underlying liability. An appropriate prudential margin reflects the cost of capital required by the market to bear the risk of holding the liability (also referred to as fair or market consistent valuations).
Quantitative Impact Study study undertaken by CEIOPS to quantify the impact of the proposed Solvency II reforms on firms’ regulatory capital requirements.
Required Minimum Margin (RMM) the main Solvency I capital requirement, calculated as a proportion of technical provisions.
Regulatory arbitrage the process of minimising the costs imposed by regulation through exploiting the differences between regulatory regimes across sectors.
Risk Capital Margin (RCM) a term used by the FSA to refer to the risk-based capital requirements that is added to the realistic valuations of life insurance firms' liabilities where the firm has a with-profits funds of more than £500m. 
Risk-free (interest) rate the rate of return available on an asset which has no or negligible credit risk.
Risk mitigation techniques methods of transferring risk including reinsurance but also through derivatives and other financial instruments. 
Run-off period the period of time over which any claim made under an insurance contract is settled.
Solvency I catch-all term for the current set of Directives governing the prudential regulation of insurance in the EU.
Solvency II the new EU framework for prudential regulation of insurance companies.
Solvency Capital Requirement (SCR) the risk-based capital requirement and key solvency control level in Solvency II. Firms may use internal models to estimate the SCR or the standardised approach.
Pillar 1 SCR the SCR determined by the standardised approach or the firm’s internal model, before consideration of the implications of the Pillar 2 supervisory review process for the firms capital requirement.
Adjusted SCR the SCR level reflecting the Pillar 2 supervisory review process including, for example, the results of stress and scenario testing.
Standardised approach (to the SCR) approach to calculating the SCR which prescribes a method for firms to apply; for example in non-life insurance it is likely that the standardised approach will be formula-based.
Supervisory co-operation processes designed to achieve effective regulation of cross border groups and consistent application of the relevant directives to insurers across the EU.
Surrender Value Floor a minimum value for an insurance liability set by the value an insurer would pay if the policyholder surrendered the policy.
Technical provisions the regulatory valuation of insurance liabilities.
Unbiased valuation (of an insurance liability) the best estimate plus a margin which reflects the true uncertainty in the insurance liability.
Tier 1, 2 capital types of eligible capital defined in the banking sector. Tier 1 includes share capital; it represents a higher quality of capital than Tier 2 which includes certain forms of subordinated debt.
Value-at-Risk the maximum loss a firm could sustain over a given period of time and with a given probability; also refers more generally to the methods used to estimate this value.

© Crown copyright 2006 Solvency II: a new framework for prudential regulation of insurance in the EU A discussion paper