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Modeling Cycle Dependence in Credit Insurance

Université Claude Bernard Lyon 1, ISFA, 69007, France
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Risks 2014, 2(1), 74-88; https://doi.org/10.3390/risks2010074
Received: 31 December 2013 / Revised: 12 February 2014 / Accepted: 20 February 2014 / Published: 14 March 2014
Business 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. View Full-Text
Keywords: credit insurance; cycles; regime-switching Markov chain; rating transition matrix; multi-factor Merton model; economic capital credit insurance; cycles; regime-switching Markov chain; rating transition matrix; multi-factor Merton model; economic capital
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Caja, A.; Planchet, F. Modeling Cycle Dependence in Credit Insurance. Risks 2014, 2, 74-88.

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