Natural catastrophe risk factors (standard formula)

Natural catastrophe risk factors are the coefficients the Solvency II standard formula applies to sums insured, country by country and zone by zone, to compute the capital charge for natural catastrophes. They sit in Delegated Regulation (EU) 2015/35 of October 10, 2014, applied since January 1, 2016. The submodule covers five perils: windstorm, earthquake, flood, hail and subsidence, the last one for France only. For each exposed country the regulation splits the territory into zones, mostly CRESTA (Catastrophe Risk Evaluation and Standardizing Target Accumulations) zones, and assigns each a risk weight. The insurer multiplies the sum insured in each zone by its weight, aggregates the zones with a country-specific correlation matrix, then applies a country factor calibrated to a 1-in-200 loss. Countries are then aggregated with each other, then perils. For windstorm two scenarios compete: a large event followed by a smaller one, or two mid-sized events, and whichever costs more after reinsurance wins. The mechanics are transparent. They also know nothing about the building: a plant built to code and a sheet-metal warehouse weigh the same if they sit in the same zone for the same amount. EIOPA (the European Insurance and Occupational Pensions Authority) reviews the parameters, and a 2019 delegated regulation recalibrated part of them. Outside the European Economic Area, a simplified premium-based method takes over. A book concentrated in a zone the table underweights shows a more flattering solvency ratio than its risk warrants. The reverse case, a well-built risk in a heavily weighted zone, is often what pushes an insurer toward a partial internal model limited to this submodule.