Credit Risk Insurance


Insurers and regulators are reliant on reinsurance firms paying their debts on time, yet often payments are not forthcoming. One factor that could affect payment is the comparatively rare event of a reinsurer’s insolvency, but there are other factors potentially at play as well, such as contractual disputes, the broader relationship between a reinsurer and insurer, and the insurer’s own operational inefficiency.

Arium is in the process of developing a receivables model to identify high risk debts – debts least likely to be paid on time. Arium did a preliminary statistical analysis of the actual time it took reinsurers to pay receivables in a small number of insurance portfolios over a five year period. A number of parameters were tested for significance such as line of business, the brokers and reinsurers of each debt, size of debt, number of reinsurers per contract, reinsurer’s credit rating and changes in that credit rating. Once further analysis and validation is carried out, these results could be used to calculate the net present value of each debt in a portfolio.

Insurers are also concerned about the potential for accumulation losses across their debt portfolios. Such accumulations occur when a single event impacts large numbers of debts. There was a risk that the political fallout of Hurricane Katrina, for example, could have forced insurers to pay claims that were outside the policy coverage of both the insureds and the insurers. If the payments were made for political, rather than contractual, reasons, reinsurers might have been able to decline to pay under reinsurance policies. Arium’s receivables model will help insurers identify where such concentrations of high risk debts could signal a portfolio’s vulnerability to a single external shock.