Liability Distributions for Mortgage Insurance

Abstract

The option model in this paper derives not only the value of an insurance policy, but also more disagregated information concerning those precise circumstances under which defaults occurs, and hence, insurance payouts need be made. In other words, this paper demonstrates the option pricing techniques necessary to provide means of assessing, not just the fair market value of an insurance contract, but also the distribution of all possible claims, and the impact on these claims of any factor that might directly or even indirectly influence the default decision.

JEL Classification: G12, G21, G22