IDEAS home Printed from https://ideas.repec.org/a/wly/finmar/v19y2010i1p21-45.html
   My bibliography  Save this article

Risk‐Based Capital and Credit Insurance Portfolios

Author

Listed:
  • Van Son Lai
  • Issouf Soumaré

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.

Suggested Citation

  • Van Son Lai & Issouf Soumaré, 2010. "Risk‐Based Capital and Credit Insurance Portfolios," Financial Markets, Institutions & Instruments, John Wiley & Sons, vol. 19(1), pages 21-45, February.
    • Handle: RePEc:wly:finmar:v:19:y:2010:i:1:p:21-45
    DOI: 10.1111/j.1468-0416.2009.00153.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1468-0416.2009.00153.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1468-0416.2009.00153.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wly:finmar:v:19:y:2010:i:1:p:21-45. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.