Credit Portfolio Modelling: for a major Swiss insurer

Challenge and Regulatory Context

  • Our client was using its own credit portfolio model (CPM) based on CreditRisk+ methodology
  • The Swiss financial regulator FINMA required more realistic modelling of credit risk, including migration risk, in the client’s investment portfolio
  • Fintegral was engaged to develop, to a challenging timescale, a new credit portfolio model compliant with FINMA requirements

Success

  • New CPM developed, tailored to client’s needs, based on CreditMetrics methodology
  • Model documentation submitted to deadline for review by the regulator
  • Model subjected to successful independent model validation by a Big4 firm
  • Model reviewed and approved by the regulator

Approach

  • Analysed investment portfolio and proposed appropriate modelling approaches for various asset types
  • Proposed a consistent credit portfolio modelling approach based on CreditMetrics methodology
  • Held several workshops on proposed methodology, provided reasoning for individual decisions, explained possible alternatives, collected and incorporated feedback
  • In order to prove that the proposed CPM methodology worked as expected a model prototype was built in R and a test run performed on the current portfolio
  • The prototype was further enhanced such that its reporting module produced all information required for Swiss Solvency Test (SST) reporting

More on Fintegral’s services in credit portfolio modelling.