Solvency II standard formula

The standard formula is the method for calculating the Solvency Capital Requirement (SCR) made available by EIOPA within the Solvency II regulatory framework for European insurers and reinsurers that do not have an approved internal model. It proceeds by decomposition into distinct risk modules: market risk (equities, interest rates, real estate, currency, spread), counterparty default risk, underwriting risks (life, health, non-life), and operational risk. Each module is subject to a capital charge calculation, then the modules are aggregated by matrix multiplication using predefined correlation matrices, producing a modular capital reduced relative to the arithmetic sum of individual charges: this is the diversification benefit. The final SCR corresponds to the value-at-risk at the 99.5 percent level over a one-year horizon, the bicentennial event. The standard formula rests on two fundamental postulates: correlations between risks are moderate and stable, and loss distributions are sufficiently estimable from historical data. These postulates are challenged for cyber risk, whose systemic nature generates tail correlations approaching one in extreme scenarios, and whose data history is too short and too unstable to credibly calibrate a bicentennial tail. The standard formula provides no dedicated cyber underwriting module and treats cyber operational risk on a flat-rate and capped basis.

A mid-sized European cyber insurer calculates its SCR using the standard formula: its cyber underwriting risk is diluted within the non-life module (premium and reserve risk, calibrated on generic factors), and its cyber operational risk is capped at 30 percent of its basic Solvency Capital Requirement. If this insurer holds 15 percent cyber premiums in its portfolio, the non-life catastrophe module triggers no dedicated charge, even though its exposure to a CrowdStrike-type scenario could represent several times its total SCR.

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