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Exceedance probability

The probability that a loss exceeds a given threshold over a one-year period, the central curve in catastrophe modeling.

Definition

Article 101 of Directive 2009/138/EC of November 25, 2009: the Solvency Capital Requirement corresponds to a one-year Value-at-Risk at 99.5%, that is an annual exceedance probability of 0.5% and a 200-year return period. Exceedance probability (EP) is the probability that an annual loss exceeds a given level, and its curve runs through all of catastrophe modeling, from capital to XL layer pricing. Two versions are used. OEP (occurrence EP) looks at the largest single event of the year; AEP (aggregate EP) at the annual sum of losses. The 1% point corresponds to the 100-year return period, the reference metric in catastrophe cover discussions.

Its 8 cross-references, woven across the glossary's 18 categories
Exceedance probability: Actuarial science glossary illustration, AlgoPolis
Example

On an insurer's European windstorm OEP curve, the 1% loss (100-year return period) is EUR 450 million. This figure serves as the reference for sizing the cat XL reinsurance program.

Read next
Actuarial scienceReturn periodAverage time between two occurrences of a given severity event, inverse of the annual exceedance probability.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 →
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QuizMeasuring what rarely happensAcademy questions on this concept, each one marked and explained.Test yourself →
Related terms
Also known as

Exceedance probability, exceedance probability curve

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