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A Study on the Maximum Guarantee Limit in Construction Bond Using the VaR

  • Journal of Insurance and Finance
  • 2007, 18(1), pp.73-101
  • Publisher : Korea Insurance Research Institute
  • Research Area : Social Science > Business Management

Cha Il-Kweon 1

1보험개발원

Accredited

ABSTRACT

This paper focuses on finding Maximum Guarantee Limit of Construction Bond using Monte Carlo Simulation and VaR(Value at Risk) methodologies. VaR is an efficient risk management method to measure the largest loss expected in the financial industry where risk factors significantly influence the values of portfolios. Through the empirical analysis using 10 accident year data of Construction Bond Insurance we show the current solvency regulation of Construction Bond insurance is not adequate to sustain insurer's financial strength because of its sensitivity to economic condition and chain reaction. Therefore, the Financial Supervisor Authority needs to consider new regulation reflecting the characteristics of Construction Bond Insurance such as the Maximum Guarantee Limit which limits maximum amount of liability to a couple of times its economic capital.

Citation status

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