Influence of Economic Factors on the Credit Rating Transitions and Defaults of Credit Insurance Business

Anisa Caja, Quentin Guibert () and Frédéric Planchet ()
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Anisa Caja: LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon
Quentin Guibert: LSAF - Laboratoire de Sciences Actuarielle et Financière - UCBL - Université Claude Bernard Lyon 1 - Université de Lyon

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Abstract: This paper presents a model for the determination and forecast of the number of defaults and credit changes by estimating a reduced-form ordered regression model with a large data set from a credit insurance portfolio. Similarly to banks with their classical credit risk management techniques, credit insurers measure the credit quality of buyers with rating transition matrices depending on the economical environment. Our approach consists in modeling stochastic transition matrices for homogeneous groups of firms depending on macroeconomic risk factors. One of the main features of this business is the close monitoring of covered firms and the insurer's ability to cancel or reduce guarantees when the risk changes. As our primary goal is a risk management analysis, we try to account for this leeway and study how this helps mitigate risks in case of shocks. This specification is particularly useful as an input for the Own Risk Solvency Assessment (ORSA) since it illustrates the kind of management actions that can be implemented by an insurer when the credit environment is stressed.

Keywords: Stress test; VECM; Macroeconomic model; Doubly stochastic assumption; Cumulative link model; Rating transition matrix; Credit insurance (search for similar items in EconPapers)
Date: 2015-07-20
New Economics Papers: this item is included in nep-ban, nep-ias and nep-rmg
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Citations: View citations in EconPapers (6)

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