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📅 '''One-year time horizon''' is the calibration period prescribed by [[Definition:Solvency II | Solvency II]] and several other risk-based [[Definition:Insurance regulation | regulatory]] frameworks for measuring the [[Definition:Solvency capital requirement (SCR) | solvency capital requirement]] — meaning that the SCR represents the amount of capital needed to absorb losses arising from adverse events occurring within the next twelve months, calibrated to a specified confidence level (99.5 percent [[Definition:Value at risk (VaR) | value at risk]] under Solvency II). Rather than projecting the full lifetime of an insurer's obligations, the framework asks: what is the worst-case deterioration in the insurer's [[Definition:Net asset value | net asset value]] over one year that would be exceeded only once in two hundred years? This annual framing distinguishes Solvency II and similar regimes from run-off or ultimate-cost approaches that measure total lifetime risk.

⚙️ In practice, the one-year horizon means that the SCR captures two channels of potential loss: actual claims, defaults, and market movements that crystallize within the year, and the change in the value of [[Definition:Technical provisions | technical provisions]] driven by updated information and revised expectations about future liabilities. For [[Definition:Long-tail insurance | long-tail]] lines of business — such as [[Definition:Liability insurance | liability]] or [[Definition:Workers' compensation insurance | workers' compensation]] — most of the one-year risk manifests not as paid claims but as [[Definition:Reserve risk | reserve deterioration]], where the best estimate of outstanding liabilities increases based on new evidence about claim severity or development patterns. For [[Definition:Market risk | market risk]], the horizon captures potential drops in asset values, widening of [[Definition:Credit spread | credit spreads]], or adverse interest rate movements over twelve months. Insurers using [[Definition:Internal model | internal models]] must validate that their simulations are appropriately calibrated to this annual window, and the choice of horizon shapes key modeling decisions around [[Definition:Correlation | dependency structures]], scenario selection, and tail behavior.

💡 The one-year convention is not without controversy. Critics argue that it understates the true risk for very long-duration obligations — a [[Definition:Life insurance | life insurer]] writing [[Definition:Annuity | annuities]] with forty-year payout horizons faces risks that a single-year snapshot may not fully capture. Defenders counter that, combined with the requirement to recalculate [[Definition:Technical provisions | technical provisions]] at market-consistent values each year, the framework effectively rolls forward continuously, with the balance sheet revaluation at each year-end serving as a proxy for longer-term risk emergence. The [[Definition:Swiss Solvency Test (SST) | Swiss Solvency Test]] employs a similar one-year time horizon but uses [[Definition:Tail value at risk (TVaR) | tail value at risk]] rather than VaR, capturing the average loss beyond the threshold rather than just the threshold itself. Understanding this calibration choice is essential for anyone interpreting [[Definition:Solvency ratio | solvency ratios]] or comparing capital adequacy across regimes, because the time horizon and risk measure together define what the reported numbers actually mean.

'''Related concepts:'''
{{Div col|colwidth=20em}}
* [[Definition:Solvency capital requirement (SCR)]]
* [[Definition:Value at risk (VaR)]]
* [[Definition:Tail value at risk (TVaR)]]
* [[Definition:Standard formula]]
* [[Definition:Internal model]]
* [[Definition:Solvency II]]
{{Div col end}}

Definition:One-year time horizon - Revision history

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