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Provisioning against borrowers default risk

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  • Nichil, Geoffrey
  • Vallois, Pierre

Abstract

This paper focuses on the risk of loan default from the point of view of an insurer required to indemnify a bank for losses resulting from a borrower defaulting. The main objective of this paper is to model the provision (or claim reserve) against the risk of borrowers defaulting. Unlike traditionally used models, our model depends on specific information concerning the borrowers (amount borrowed and term of loan). Our approach will also take into account three kinds of dependence: the dependence between each claim amount (by taking into account the real estate price), the dependence between the date of default and the claim amount, and the dependence between the number of defaults and the claim amount. Both theoretical and applied, our model allows the calculation of the mean, the variance, and the law of the provision. The amount of data available allows us to estimate all the parameters and to calculate the mean and the variance plus the quantiles of the provision.

Suggested Citation

  • Nichil, Geoffrey & Vallois, Pierre, 2016. "Provisioning against borrowers default risk," Insurance: Mathematics and Economics, Elsevier, vol. 66(C), pages 29-43.
    • Handle: RePEc:eee:insuma:v:66:y:2016:i:c:p:29-43
    DOI: 10.1016/j.insmatheco.2015.10.004
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    References listed on IDEAS

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    1. Larsen, Christian Roholte, 2007. "An Individual Claims Reserving Model," ASTIN Bulletin, Cambridge University Press, vol. 37(1), pages 113-132, May.
    2. Mack, Thomas, 1993. "Distribution-free Calculation of the Standard Error of Chain Ladder Reserve Estimates," ASTIN Bulletin, Cambridge University Press, vol. 23(2), pages 213-225, November.
    3. Mack, Thomas, 1999. "The Standard Error of Chain Ladder Reserve Estimates: Recursive Calculation and Inclusion of a Tail Factor," ASTIN Bulletin, Cambridge University Press, vol. 29(2), pages 361-366, November.
    4. Arjas, Elja, 1989. "The Claims Reserving Problem in Non-Life Insurance: Some Structural Ideas," ASTIN Bulletin, Cambridge University Press, vol. 19(2), pages 139-152, November.
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    Cited by:

    1. Geoffrey Nichil & Pierre Vallois, 2019. "Solvency Need Resulting from Reserving Risk in a ORSA Context," Methodology and Computing in Applied Probability, Springer, vol. 21(2), pages 567-592, June.

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