Operational Risk

Overview

Article 204 defines the Operational Risk formula within the Solvency II standard formula.^[1] The formula combines BSCR, Op, and Exp UL, with a visible cap status indicator for the regulatory BSCR cap.

Input Terms

• BSCR: The Basic Solvency Capital Requirement, used to apply the regulatory 30% cap on operational risk capital requirement.^[1]
• Op: Operational-risk amount before the BSCR cap and before the unit-linked expense add-on.^[1]
• Exp UL: Annual expenses for unit-linked life contracts where policyholders bear the investment risk.^[1]

Technical Rationale

The Operational Risk module follows a 99.5% confidence level over a one-year horizon. Unlike underwriting or market modules, operational risk is determined using a volume-based formula rather than a specific scenario-driven shock. This approach recognizes that operational failures (people, processes, or systems) scale with the complexity and size of the undertaking's business.^[1]

Article 204 caps the main operational-risk amount against BSCR because the volume proxy should not dominate the diversified insurance risk profile without limit.^[1] The unit-linked expense component is then kept additive because those contracts leave investment risk with policyholders while retaining administration and control risk inside the undertaking.

Unit-linked life business is shown separately through Exp UL, so the 25% add-on is visible directly in the final formula.

Important Notes

• BSCR Cap Binding: If the calculated operational risk amount exceeds 30% of the BSCR, the calculator automatically floors the result at the regulatory maximum. A binding cap indicates a high volume of operational activity relative to the diversified insurance risk.
• Input alignment: Op, Exp UL, and BSCR should use the same valuation date and perimeter.
• Gross vs. Net SCR: This calculator determines the standalone Operational Risk SCR. Operational risk is added to BSCR at the top SCR layer, and the undertaking's final net SCR is only finalized after the top-level LAC TP and LAC DT adjustments.
• Regulatory deviation: Material deviation from standard-formula assumptions at this layer may support a capital add-on or a move toward an internal model where justified.^[2]
• Reporting: The displayed result is intended to support the corresponding standard-formula component for the S.25.01.01 standard-formula reporting view.^[3]