Risk horizon
Time period over which loss exceedance probability is evaluated, significantly altering results for rare risks.
Article 101 of the Solvency II Directive (2009/138/EC): the SCR corresponds to the value at risk of basic own funds at a 99.5% confidence level over a one-year period. The risk horizon is that period, the one over which you calculate the probability of an event occurring or a loss threshold being exceeded. For catastrophes it changes everything: a 100-year return period event has a 1% probability over one year but roughly 26% over 30 years. In solvency, the standard horizon is therefore one year. For pricing a property asset, it may be the mortgage term. Long-term studies, on climate change or nuclear risk, may run beyond 50 years. A probability calculated over one year does not answer a decision that commits thirty years, and the analysis has to cover the same span as the decision.
Textbook case: 500-year return period tsunami: 0.2% probability / year. Over a 100-year coastal industrial site lifespan: probability ≈ 18%.
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