Loss given default
Share of exposure permanently lost when a debtor defaults, the complement of the recovery rate, and a variable that worsens precisely when defaults multiply.
Take 900 million euros of private credit on an insurer's balance sheet as of December 31, 2025. A recession that takes the annual default rate from 1.2% to 4.5% and drags recoveries from 65% to 40% moves expected loss from 3.8 to 24.3 million euros, more than six times over, where the default rate alone would have multiplied it by 3.75. The gap comes from loss given default, what does not come back to the creditor, one minus the recovery rate. A default often leaves a senior secured holder a good share of par, and a subordinated one next to nothing. Rank in the capital structure explains most of the dispersion. Sector matters too, a reusable industrial asset liquidating better than an intangible one. The cycle is the driver most often forgotten: recoveries drop when defaults pile up, because everyone is selling the same assets at the same moment. A model that treats probability of default and loss given default as independent therefore badly understates tail loss, even with two parameters each correctly calibrated on its own.
Private credit portfolio of 900M EUR on an insurer's balance sheet as of December 31, 2025. A recession scenario taking the annual default rate from 1.2% to 4.5% and the recovery rate from 65% to 40% does not multiply loss by 3.75 but by more than six: expected loss moves from 3.8M to 24.3M EUR, and the gap comes from both parameters deteriorating at once.
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