Residual Policies
Business Challenge
- Inaccurate residual policies create downstream losses or limit new business activity.
- No approach existed to validate the residual policies that were purchased.
- Changes in equipment features over time complicated the understanding residual value.
Action Taken
- Teamed with SMEs to consider alternate methods and to develop concept approach.
- Modeled 'constant' value over time using historical sale prices, holding collateral features constant, then restated collateral value to current dollars.
- Modeled depreciation curve for each asset class.
- Developed, validated, and rolled out policy matrix.
Business Results
- Developed a framework to analyze residual policies. This increased the level of understanding of market risk and collateral valuation over time.
- Developed an in-house capability which reduced the need to purchase residual policies.
- The first year introduction prevented significant overstatement of residuals, preventing potential downstream losses.