Credit Insurance, Risk Mitigation Techniques and Economic Contribution
121 Pages Posted: 4 Aug 2014 Last revised: 18 Aug 2014
Date Written: November 1, 2013
This research study is an exploration of the function of credit insurance as a risk mitigation technique and capital relief instrument. Credit insurance is a widely used product in the industry and helps the insured parties shift or combine the risk of the debtor (their counterparty/ies) to or with the risk of the insurer. This research study is an exploration of the effects of insurance in financial markets and in terms of risk weight and economic aspects. A qualitative research was conducted through questionnaires and interviews; the targeted focus group were banks and insurance market players. The objective of this dissertation is clear: to explore the classical and comprehensive insurance policies covering the risk of a loan from the perspective of a bank that will be the insured party. Thus, the credit derivatives such as CDS are excluded from this research study since they are not insurance covers, as mentioned and indicated by the author in the relevant chapters. Aside from this, bond insurance is also excluded although some substantial parts of the loan-related insurance covers may be well applied to bonds too. The study also emphasizes that the risk does not end once any asset is insured but becomes the risk of the insurer, which is the new counterparty once the insurance policy is concluded. In this respect, the insured parties (financial institutions, mainly banks in this dissertation) should be cautious and properly analyze the insurers as well. The findings culminate in with the conclusion that, if properly done, credit insurance helps banks reduce their risk-weighted assets, hold adequate capital, and efficiently manage their risks and portfolio.
Keywords: credit insurance, risk mitigation, CRT, risk-weight, RWA, risk transfer
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