Summary

When a country experiences deep economic depression the losses in credit (surety) insurance may reach catastrophic dimensions for several years. During that time the number of claims can be extraordinary large and, what is more important, the proportion of excessive claims can be much higher than usual. This kind of phenomenon is difficult to capture with the standard methods of risk theory. In this paper we study credit risk modelling in the economic cycle point of view. First we discuss the usefulness of economic forecasts to actuaries. Then we propose a model that utilises a modification of a well-known Markov process description of an economic business cycle. The states of the used Markov process represent economic expansion, recession and deep depression. The Markov model fits well into the accumulation process of claims in consecutive years. When a simple description of the states of the Markov process is found, this approach leads to parsimonious modelling. The proposed actuarial model is used for simulating purposes in order to study the effect of the economic cycle on the needed pure premium and initial risk reserve. The choice of parameters for the model is motivated by empirical observations