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The Actuary The magazine of the Institute & Faculty of Actuaries

Modelling extreme credit events

Insurers are required to be able to withstand a 
one-in-200-year event over the next year for regulatory purposes (Solvency II SCR, ICA, etc), which leads to some interesting challenges for eliciting and modelling these extreme events.

The paper presented focuses on tackling this puzzle in credit space, looking as far back as we can (~90 years of data), using a large number of statistical techniques with the aim of modelling extreme credit outcomes over a one-year 
time horizon.

This turns out to be a non-trivial problem, and the authors discuss the process one may go through when aiming to elicit such a view, highlighting the existence of potential hurdles and illustrating how different methods compare.

All discussion and comments are very 
much welcomed.