Risk-Based Capital for Credit Insurers with Business Cycles and Dynamic Leverage
This paper develops a risk-based capital pricing model for credit insurance portfolios held by a vulnerable insurer
Abstract
This paper develops a risk-based capital pricing model for credit insurance portfolios held by a vulnerable insurer. 皇冠体育app model accounts for business cycles using a two-state Markov switching model, and allows for dynamic leverage adjustment by the insured firms. 皇冠体育app new proposed model, which incorporates risk-based capital practice, is better for both the insurer and the insured firms. Based on the risk-adjusted performance metric, we found that the insurer is better off insuring short- and medium-term loans in expansion and steady states, while it is better off backing both short- and long-term loans in recessions. Our results also emphasise that macroeconomic uncertainty significantly impairs the creditworthiness of the insurer and insured firms.
This is an output from the 鈥楧elivering Inclusive Financial Development and Growth鈥� project
Citation
Issouf Soumar茅 & Ernest Tafolong聽(2016)聽Risk-based capital for credit insurers with business cycles and dynamic leverage,Quantitative Finance,聽17:4,聽597-612