Counterparty Default Adjustment

Overview

This calculator is a simplification helper for the counterparty-default adjustment applied to reinsurance recoverables within technical provisions.^[1][2] It is a shortcut view for one counterparty and a homogeneous risk group, so it should be used as a proportionality aid or validation check rather than a replacement for a fuller recoverables model.

Input Terms

• 12-Month Probability of Default (PD): 12-month default probability applied to the recoverables exposure.
• Modified Duration of Recoverables: Duration measure used to scale the sensitivity of the recoverables balance.
• Amounts Recoverable from Reinsurance Contracts: Reinsurance recoverables amount exposed to the counterparty default adjustment.

Technical Rationale

The adjustment reduces the value of reinsurance recoverables to reflect the chance that not all of the contractual benefit will actually be collected. Economically, it stops the best estimate from treating reinsurer credit as risk-free and makes longer-dated recoverables more vulnerable because they remain exposed to counterparty weakness for longer.

Important Notes

• The duration input matters because longer-dated recoverables remain exposed to reinsurer default for longer and therefore attract a larger adjustment.
• This page is intentionally narrow. Multiple counterparties, collateral effects, or heterogeneous recoverables profiles should be assessed on a fuller build before the result is relied on for material balances.
• A more negative Counterparty Default Adjustment reduces the recoverables benefit available in technical provisions and can therefore increase the net liability position.