Modeling Cycle Dependence in Credit Insurance
AbstractBusiness and credit cycles have an impact on credit insurance, as they do on other businesses. Nevertheless, in credit insurance, the impact of the systemic risk is even more important and can lead to major losses during a crisis. Because of this, the insurer surveils and manages policies almost continuously. The management actions it takes limit the consequences of a downturning cycle. However, the traditional modeling of economic capital does not take into account this important feature of credit insurance. This paper proposes a model aiming to estimate future losses of a credit insurance portfolio, while taking into account the insurer’s management actions. The model considers the capacity of the credit insurer to take on less risk in the case of a cycle downturn, but also the inverse, in the case of a cycle upturn; so, losses are predicted with a more dynamic perspective. According to our results, the economic capital is over-estimated when not considering the management actions of the insurer.
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Bibliographic InfoArticle provided by MDPI, Open Access Journal in its journal Risks.
Volume (Year): 2 (2014)
Issue (Month): 1 (March)
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credit insurance; cycles; regime-switching Markov chain; rating transition matrix; multi-factor Merton model; economic capital;
Find related papers by JEL classification:
- C - Mathematical and Quantitative Methods
- G0 - Financial Economics - - General
- G1 - Financial Economics - - General Financial Markets
- G2 - Financial Economics - - Financial Institutions and Services
- G3 - Financial Economics - - Corporate Finance and Governance
- M2 - Business Administration and Business Economics; Marketing; Accounting - - Business Economics
- M4 - Business Administration and Business Economics; Marketing; Accounting - - Accounting
- K2 - Law and Economics - - Regulation and Business Law
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