The risk of a pandemic in Solvency 2

SCR refers to "the level of capital allowing an insurance company to absorb significant unforeseen claims while reassuring policyholders that payments will be made when due".

The SCR is calculated using either a standard formula developed at a European level, or an in-house model specific to the insurance company. In the latter case, the SCR takes better account of the insurer's risk profile.

Evaluated using a standard formula or an internal model, this pandemic risk coverage SCR must necessarily correspond to the shareholder’s capital required to guarantee all of the insurer's obligations over a timeframe of one year.

In the meantime, the European lawmaker has determined a level of confidence based on a scenario of a bicentennial pandemic. The probability of ruin is set at 0.5% but no specific reference exists at present to build a coherent internal model which would take into account at the same time the risks of mortality and morbidity resulting from a scenario of influenza pandemic.

In this context, all the significant and quantifiable risks to which an insurer is exposed are included in the SCR estimate.

A quantitative impact survey called "QIS 5", published by the European authority EIOPA ⁽¹⁾ shows that the calculation of the SCR must take into account different risk modules:

• Operational risk (SCRop),
• Market risk (SCRmarket),
• Health underwriting risk (SCRhealth),
• Counterparty risk (SCRdefault),
• The life underwriting risk (SCRlife),
• The non-life underwriting risk (SCRnon-life),
• The risk of intangible assets (SCRintang).

Each module depends on certain criteria.

⁽¹⁾ European Insurance Occupational Pensions Authority (EIOPA)

Examples:

• Market risk takes into account the interest rate, shareholder’s equity, charge rate, etc.
• Disease risk takes into account mortality, longevity, disability, etc.

The risk of taking out provident insurance is linked to two risks:

• The life underwriting risk
• The health underwriting risk

Determining the SCR of these two risks is subject to an underlying module, the catastrophe risk of an influenza pandemic by two means:

• The HealthCAT(Health disaster) sub-module for the risk of health underwriting.
• The LifeCAT (Life Disaster) sub-module for the life underwriting risk.

According to the European authority EIOPA, an influenza pandemic occurring once every 200 years generates an excess mortality of 0.15%.

Insurers use this type of standard configuration to simulate formulas and better estimate the SCR dedicated to these modules.