Counterparty risk analysis using Merton's structural model under Solvency II
Luis Otero González / Pablo Durán Santomil / Sara Fernández López / Milagros Vivel Búa
Universidad de Santiago de Compostela (España)
The new solvency regulation in the European insurance sector, denominated Solvency II, will completely transform the system of capital requirements estimation. Recently it has introduced the latest quantitative impact study (QIS5), which provides the calculation method in the internal model for the determination of capital requirements. The aim of this paper is to analyze the adequacy of the calibration of the counterparty credit risk by the models proposed in recent quantitative impact reports (fourth and fifth). To do this we compare capital requirements obtained by the two alternatives, against which that results from applying a simulation model based on the structural approach. The results shows that the use of probabilities based on the methodology of Merton, which can be used in an internal model, compared to those based on ratings (standard model) result in substantially higher capital requirements. In addition, the model proposed in QIS4 based on Vasicek distribution is not appropriate when the number of counterparties is reduced, a common situation in the European insurance sector. Moreover, the new proposal (QIS5 or Ter Berg model) is more versatile and suitable than its predecessor but requires further research in order to improve the calibration hypothesis and, thus, to better approximate estimates to the risk actually assumed.
KeyWords: QIS4; QIS5; counterparty default risk; structural models; internal models; Solvency II
DOI: 10.5295/cdg.110314lo
Bibliographic: Otero González, L., Durán Santomil, P., Fernández López, S. and Vivel Búa, M., 2015. Análisis del riesgo de contraparte a través del modelo estructural de Merton en el marco de Solvencia II. Cuadernos de Gestión, 14 (2), 99-120. DOI: 10.5295/cdg.110314lo
JEL Classification: G2, C6

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