Continuous Monitoring: Look before You Leap∗

In this paper we present a model for pricing credit risk protection for a limited liability non-life insurance company. The protection is typically provided by a guaranty fund. In the case of continuous monitoring, i.e., where the market values of the company’s assets and liabilities are continuously observable, and where the market values of assets and liabilities follow continuous processes, the regulators can ∗First version: November 7, 2005. This version: January 30, 2007. Earlier versions of this paper have been presented at the FIBE conference in Bergen, Jan 2007, and at faculty seminars at the Insurance and Risk Management Department at the Wharton School, University of Pennsylvania and at the Department of Finance and Management Science, Norwegian School of Economics and Business Administration. The paper was partially written while Lindset was a visiting scholar at the Insurance and Risk Management Department at the Wharton School, University of Pennsylvania. The authors would like to thank Knut Aase and Neil Doherty for comments and discussions.