Credit Default Modelling and Bond Portfolio Risk Management for Nigerian Life Insurers

This study develops credit default models for Nigerian bond portfolios held by life insurance companies and examines their implications for investment risk management and regulatory capital. Nigerian life insurers hold substantial allocations of federal and state government bonds, as well as corporate bonds, in their investment portfolios. While federal government bonds carry negligible default risk, state government securities and corporate bonds carry meaningful credit exposure that is not always adequately captured in insurer risk management frameworks. This study uses credit rating data from Agusto and Co, bond yield spreads from FMDQ records, and portfolio composition data from the annual reports of 10 life insurers for 2019 to 2023. Default probability models for state government and corporate bond issuers are developed using probit regression applied to fiscal health indicators. Value-at-Risk and Conditional Value-at-Risk measures for credit loss are computed at 95 and 99.9 percent confidence levels. Findings reveal that state government bonds carry significantly higher implied default probabilities than their pricing spreads suggest, particularly for states with high debt service ratios. Several life insurers have concentrations in state government securities exceeding 25 percent of their investment portfolios, creating material credit concentration risk. The study concludes that credit default risk in life insurer bond portfolios is materially underestimated in current risk frameworks. It recommends that NAICOM introduce explicit credit risk capital charges in its solvency framework for non-federal government fixed income holdings.

Keywords: credit default, bond portfolio, life insurance, risk management, Nigerian capital market.