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PML

Background
Between July 2002 and March 2004, the group has been able to bring together the majority of the credit and surety insurers and reinsurers to come up with

common definitions of terms,
to design a study which realistically represents the process of trade credit insurance,
to obtain the first encouraging results for the percentage of LGD in the industry.

Scope
The basic idea is to demonstrate the ability of the credit insurers to dynamically manage their exposure to risk. For this, we propose to compute the loss given default (LGD) from a position where the portfolio is not subject to a strong risk, which is usually the case. In this case, the LGD should provide a good measure of the expected loss for defaulted cases (buyers). It can be divided into two phases.

alpha phase	This is the ratio between the claims and the granted limits at an unstressed time before the buyer got financial problems. Among other things a low alpha value can be obtained by an insurer through monitoring the risks and reducing granted limits when he recognises problems.
omega phase	This is the ratio between the ultimate loss and the claims. Due to an active claims handling an insurer can reduce the loss by recovering cost and representation of his policyholder in the dispute with the defaulted buyer.

Both measures are an indication of the success of an insurer and are needed to determine the LGD. The LGD is one building block to calculate the expected loss of a portfolio. The second necessary measure is the probability of default (POD). Policy or portfolio specific data further determine the expected loss. Insurers using internal models for solvency requirements can specify needed risk capital by using the parameters of the LGD study.

Pilot Study
In cooperation with the Seminar for Statistics at ETH Zurich, a first pilot study has been carried out and based on the findings some adaptations and increments for the definitions have been made. Furthermore a sampling randomised scheme for selecting cases has been developed to guarantee scientific reliability, so that study will fulfil both, academic properness and practical use.

Main Study: Current Status
In July 2004 the study started with 28 insurers and reinsurers as participants who have a good coverage of the credit insurance market. Data collection has been divided into three annual collection cycles. In June 2007 the last of these cycle will be finished and large data base will be available. Based on this data, a statistical analysis will be conducted by the Seminar for Statistics and in Spring 2008, results will be ready for publication. A first analysis with a reduced data base showed promising results and supported the findings of the pilot study.

Documents
The PML Study, Or An Industry Gets Together to Study its Own Risk – A Progress Report
Reaching their limits
Industry Definitions

Useful link
http://www.cs-pml.org/

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