Risk‐Based Capital and Credit Insurance Portfolios

Van Son Lai and Issouf Soumaré

Financial Markets, Institutions & Instruments, 2010, vol. 19, issue 1, 21-45

Abstract: This paper analyzes the risk‐management practices of a vulnerable credit insurer by studying the effects of time‐varying correlations, asset risks and loan maturities on the risk‐based capital that backs credit insurance portfolios. Since asset correlations may change over a business cycle, we have analyzed these effects by means of a one‐factor Gaussian stochastic model as part of an extended contingent claims analysis. Our results show the need to account for cyclical changes to correlations in the pricing of credit insurance. When compared with the reserve of risk‐based capital recommended by the Basel II Internal Ratings‐Based (IRB) approach, our model provides a better capital buffer against extreme credit losses, especially in times of recession and/or in a risky business environment. Using a risk‐adjusted performance metric (RAPM), we find insurers perform better when insuring relatively short‐term loans. We also make several policy recommendations on creating a reserve of risk‐based capital to protect against possible loan losses.

Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/j.1468-0416.2009.00153.x

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:finmar:v:19:y:2010:i:1:p:21-45

Access Statistics for this article

More articles in Financial Markets, Institutions & Instruments from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().