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The development of a simple and intuitive rating system under Solvency II

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  • Van Laere, Elisabeth
  • Baesens, Bart
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    Abstract

    Regulatory authorities pay considerable attention to setting minimum capital levels for different kinds of financial institutions. Solvency II, the European Commission's planned reform of the regulation of insurance companies is well underway. One of its consequences will be a shift in focus to internally based models in determining the regulatory capital needed to cover unexpected losses. This evolution emphasises the importance of credit risk assessment through internal ratings. In light of this new prudential regulation, this paper suggests a Basel II compliant approach to predicting credit ratings for non-rated corporations and evaluates its performance compared to external ratings. The paper provides an interesting modelling of non-financial European companies rated by S&P. In developing the model, broad applicability is set as an important boundary condition. Even though the model developed is fairly simple and maintains a high level of granularity, it gives high rates of accuracy and is very interpretable.

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    Bibliographic Info

    Article provided by Elsevier in its journal Insurance: Mathematics and Economics.

    Volume (Year): 46 (2010)
    Issue (Month): 3 (June)
    Pages: 500-510

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    Handle: RePEc:eee:insuma:v:46:y:2010:i:3:p:500-510

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    Web page: http://www.elsevier.com/locate/inca/505554

    Related research

    Keywords: IB52 IE50 Solvency II Insurance Credit scoring External ratings Internal ratings;

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    Cited by:
    1. Eling, Martin & Pankoke, David, 2013. "Basis Risk, Procylicality, and Systemic Risk in the Solvency II Equity Risk Module," Working Papers on Finance, University of St. Gallen, School of Finance 1306, University of St. Gallen, School of Finance.

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