The development of a simple and intuitive rating system under Solvency II
Van Laere, Elisabeth Baesens, Bart
Van Laere, Elisabeth
Baesens, Bart
Citations
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2010
Journal
Insurance: mathematics and economics
Book
Publication Volume
46
Publication Issue
3
Publication Begin page
500
Publication End page
510
Publication NUmber of pages
Collections
Abstract
Regulatory authorities pay considerable attention to setting minimum capital levels for different kinds of financial institutions. Solvency II, the European Commission’s planned reform of the regulation of insurance companies is well underway. One of its consequences will be a shift in focus to internally based models in determining the regulatory capital needed to cover unexpected losses. This evolution emphasises the importance of credit risk assessment through internal ratings. In light of this new prudential regulation, this paper suggests a Basel II compliant approach to predicting credit ratings for non-rated corporations and evaluates its performance compared to external ratings. The paper provides an interesting modelling of non-financial European companies rated by S&P. In developing the model, broad applicability is set as an important boundary condition. Even though the model developed is fairly simple and maintains a high level of granularity, it gives high rates of accuracy and is very interpretable.