LOSS PORTFOLIO ANALYSIS
Sigma's Loss Portfolio Analysis is designed to provide financial managers and their senior management with independent analyses of loss portfolios from an actuarial perspective.
The benefits of this analysis include:
- Independent analyses of the loss portfolio
- Comprehensive historical review of the portfolio
- A graphical representation of the current portfolio parameters
- An understanding of ALG residuals, historical performance and underlying methodologies
- Statistically valid residual loss projections
- Computation of the net present value cost of residual losses
- Sensitivity analysis of variance in used vehicle prices
The staff at Sigma brings together the unique experience and technical expertise of experienced actuarial consultants, risk management consultants, mathematicians and specific experience in the development, pricing, marketing and management of loss portfolios.
Some of the analyses we typically complete as part of the Loss Portfolio Analysis are:
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Historical Portfolio Analysis
The historical portfolio analysis provides a table and graphical summary of the portfolio's history. This analysis provides a foundation for the loss forecasting stage of the analysis. All analyses are presented in a table and graphical format and includes:
- Model mix
- Term mix
- Summary of residual enhancements by model
- Computation of disposal rates (by model and term) tracked for trend analysis
- Computation of residual losses (by model and term) tracked for trend analysis
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Current Portfolio Analysis
The risk manager or broker can be even more effective in negotiating a security requirement when they understand the biases and anomalies that adversely affect the calculation. This checklist discusses eleven issues and adjustments needed to more accurately measure loss experience and the analysis includes:
- Model mix
- Term mix by model
- Summary of residual enhancement by model
- Full term liquidation graph showing scheduled terminations by month
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Historical Model Value Performance vs. ALG
This service provides the information necessary to determine how closely disposal values track with ALG residuals. This analysis compares each model's actual residual value at time of disposal to the forecasted ALG residual value when the vehicle was booked and other data regarding used vehicle values. The analysis includes:
- Historical ALG residual vs. actual disposal value
- Historical ALG residual value vs. other data regarding used vehicle values
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Residual Loss Forecast Purpose
These analyses forecast the residual losses and gains for the current portfolio. The forecast is based on actual portfolio characteristics, market trends and other industry data. Qualitative issues such as aggressive telemarketing or incentive programs are also considered in setting the loss projections.
Losses are forecast by model and month and presented as a point and interval estimate. This allows the loss reserves to be set according to the desired level of confidence. Statistically valid projections are provided with an estimate of the error potential. Point and interval estimates are generated to demonstrate the expected loss or gain value along with a measure of the expected variability. This allows for a decision to be made to set reserves at a certain confidence level. The loss projections take into consideration the evaluation of each model's disposal rates and expected used vehicle values. The following are considered:
- Projected liquidation pattern
- Expected residual gains or losses by year
- Point estimate for the total portfolio losses by year
- Interval estimate (confidence intervals 10% to 90%) for the total portfolio losses by quarter
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Cash-Flow Analysis
The cash flow analysis provides the net present value of future losses. The net present value cost of the forecasted losses is determined based on an estimate of the timing and severity of the losses and the net present value cost at different discount rates is considered.
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Sensitivity Analysis
The sensitivity analysis reflects the impact on projected losses of changes in the used vehicle market.
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