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Return period

Average time between two occurrences of a given severity event, inverse of the annual exceedance probability.

Definition

Article 101 of the Solvency II Directive of November 25, 2009: the solvency capital requirement corresponds to a 99.5% value at risk over one year, in other words the 200-year return period shock. The return period is the inverse of the annual exceedance probability: a 100-year event has a 1% chance of occurring in any given year. That does not mean it happens only once per century. Over a 30-year exposure, the probability of experiencing at least one is about 26% (1−0.99³⁰). The definition assumes statistical stationarity, an assumption climate change calls into question. Return period is the reference metric for catastrophe pricing and extreme risk modeling.

Its 5 cross-references, woven across the glossary's 18 categories
Return period: Actuarial science glossary illustration, AlgoPolis
Example

Textbook case: a 200-year return period flood has a 0.5% annual probability. For an insurer exposed over 40 years, the probability that it occurs is about 18%.

Read next
Actuarial scienceExceedance probabilityThe probability that a loss exceeds a given threshold over a one-year period, the central curve in catastrophe modeling.Read the entry →Actuarial scienceCatastrophe model (cat model)A probabilistic simulation tool that estimates potential losses of rare catastrophic events from simulated scenarios, combining a hazard module, an exposure module, a vulnerability module and a financial module.Read the entry →Actuarial scienceValue at Risk and Tail Value at Risk (VaR, TVaR)VaR is the loss exceeded only with a given probability; TVaR is the average loss once it is exceeded. The first sets a threshold, the second measures the tail.Read the entry →
Put it to work
QuizMeasuring what rarely happensAcademy questions on this concept, each one marked and explained.Test yourself →
Related terms
Go further at the Academy
Also known as

return period, recurrence interval, ARI, 1-in-200

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