Credit Risk and Solvency Capital Requirements

European Actuarial Journal, Vol. 8, N°2, p. 487–515, 2018

29 Pages Posted: 19 Mar 2016 Last revised: 26 Apr 2019

See all articles by Jérémy Allali

Jérémy Allali

SMABTP

Olivier Le Courtois

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control

Mohamed Majri

SMABTP

Date Written: March 18, 2016

Abstract

This article constructs a recovery-based framework for computing the credit Solvency Capital Requirements of insurers under the constant position paradigm. Although this framework is most suited under the Solvency 2 regulation, it also provides concepts that can be useful under the Basel regulation. After a brief survey of the extant 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 Merryll Lynch indices are given. The reconstructed historical credit values are then calibrated to mixed empirical-Generalized Pareto Distribution (GPD) dynamics. Several validations of the calibration 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

JEL Classification: G10, G22

Suggested Citation

Allali, Jérémy and Le Courtois, Olivier Arnaud and Majri, Mohamed, Credit Risk and Solvency Capital Requirements (March 18, 2016). European Actuarial Journal, Vol. 8, N°2, p. 487–515, 2018, Available at SSRN: https://ssrn.com/abstract=2749664 or http://dx.doi.org/10.2139/ssrn.2749664

Jérémy Allali

SMABTP ( email )

114 avenue emile zola
paris, 75015
France

Olivier Arnaud Le Courtois (Contact Author)

EM Lyon (Ecole de Management de Lyon) - Department of Economics, Finance, Control ( email )

23, av. Guy de Collongue
69134 Ecully Cedex
France

Mohamed Majri

SMABTP ( email )

114 avenue emile zola
paris, 75015
France

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