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European Actuarial Journal

, Volume 8, Issue 2, pp 487–515 | Cite as

Credit risk and solvency capital requirements

  • Jeremy Allali
  • Olivier Le CourtoisEmail author
  • Mohamed Majri
Original Research Paper
  • 117 Downloads

Abstract

Credit risk permeates the assets of most insurance companies. This article develops a framework for computing credit capital requirements under the constant position paradigm and taking into account recovery rates. Although this framework was originally derived under the Solvency 2 regulation, it also provides concepts that can be useful under other international regulations. After a brief survey of the existing technology on rating transitions and default probabilities, the paper provides new results on risk premium adjustment factors. Then, three different procedures for reconstructing constant position market-consistent histories of credit portfolios from quoted Merrill Lynch indices are given. The reconstructed historical credit values are modeled via mixed empirical-Generalized Pareto Distribution (GPD) dynamics and a detailed parameter estimation is performed. Several validations of the estimation are also provided. Finally, credit Solvency Capital Requirements are computed and an analysis of the results per rating class is given.

Keywords

Credit spread Risk premium adjustment factor Solvency capital requirement General pareto distribution Market consistency Rating transition Credit benchmarking Constant position 

Notes

Acknowledgements

The authors would like to thank Philippe Desurmont, Anthony Floryszczak, Donatien Hainaut, François-Xavier de Lauzon, Jacques Lévy-Véhel, Hubert Rodarie, Li Shen, Xia Xu, and Christian Walter for their useful comments.

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Copyright information

© EAJ Association 2018

Authors and Affiliations

  • Jeremy Allali
    • 1
  • Olivier Le Courtois
    • 2
    Email author
  • Mohamed Majri
    • 1
  1. 1.Groupe SMAParisFrance
  2. 2.EMLYON Business SchoolEcully CedexFrance

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