Probability that a loss exceeds a given threshold over a one-year period, the central curve in catastrophe modeling.
Exceedance probability (EP) is the probability that an annual loss exceeds a given level. The EP curve is the central tool in catastrophe modeling and XL layer pricing. OEP (occurrence EP: probability that the largest single event of the year exceeds the threshold) and AEP (aggregate EP: probability that the annual sum of losses exceeds the threshold) are distinguished. The 1% exceedance probability corresponds to the 100-year return period, the reference metric in catastrophe cover discussions. The horizontal axis of an EP curve gives the loss amount, the vertical axis the probability.
European windstorm OEP curve: 1% probability loss (100-year return period) = 450 M EUR. This figure serves as the reference for sizing the cat XL reinsurance program.
exceedance probability, AEP, OEP, probabilité d'excédement, annual exceedance probability