Stochastic modelling of reinsurance credit risk

Existing credit portfolio risk models tend to not account well for the variability of reinsurance recoverables and result in inadequate capital requirements. Here, Michael Brunner and Verena Goldammer present a methodology drafted along the requirements in the Solvency II regulation that addresses this as part of an internal model and is a material improvement to the counterparty default risk module of the standard formula

Credit risk from reinsurance recoverables (RR) is a critical exposure for insurance companies, which have to quantify this risk consistently with other positions, mainly on bonds and loans. These figures must be appropriately aggregated within credit risk and with other risk types (e.g. market, underwriting, operational risk) to obtain an overall risk figure within an internal risk model.

Click here to view the article.