RT Journal Article
SR Electronic
T1 An Analysis of Portfolios of Insured Debts
JF The Journal of Fixed Income
FD Institutional Investor Journals
SP 55
OP 64
DO 10.3905/jfi.2006.640277
VO 16
IS 1
A1 Michel Gendron
A1 Van Son Lai
A1 Issouf Soumaré
YR 2006
UL https://pm-research.com/content/16/1/55.abstract
AB This article analyzes multi-year risk management decisions in portfolios of insured debts or credit insurance. This is done by investigating risk reduction through portfolio diversification, increased insuring capacity and changes in contracts maturities. We propose a contingent-claims model that includes many realistic features such as coupon payments, stochastic interest rate and stochastic cash flows volatility. We distinguish between two types of portfolios: ‘closed’ and ‘opened’. We find that for a given riskiness level of insurer's capital, an optimal value of credit insurance can be obtained by appropriate risk diversification and/or increased insurer's capital. Our simulation results show that for insurers with high risk exposure, portfolio risk diversification is more effective than increasing insuring capacity. For a creditworthy insurer, increasing the size of the insurer’s capital can lead to significant improvement in the value of the credit insurance portfolio. This suggests that alternative risk transfer techniques, which provide synthetic (or contingent) capital to the insurer, should be considered in an integrated risk management.TOPICS: Risk management, credit risk management, portfolio management/multi-asset allocation