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Confidential Client

Automobile Residual Value Risk Insurance Program - GBP 457,000,000


A client (the Client), a major international reinsurance company, was approached by Motability Finance Limited (MFL), a U.K. manager of a portfolio of leased automobiles, which had assumed an undesirable exposure to residual value risk associated with automobile leases incepting over a 5 year period (the Portfolio). MFL was seeking to arrange an excess-of-loss insurance policy (the Policy) to protect it against losses in excess of 10% of the Portfolio value up to a limit of 50% for five risk years. The Client was considering taking at 45% participation in the Policy.

Client Need

The Client required a credible framework for understanding the underlying risk of the Portfolio and retained The RISConsulting Group LLC (RISC) to develop a model to assist it (as exclusive technical advisor) in developing retrocessional capacity.

The Solution

RISC developed a model (the Model) in close cooperation with the Client. The Model measured the size and likelihood of possible losses to the Portfolio by simulating the fundamental economic variables (e.g., GDP growth, inflation, interest rates, and unemployment rates) and industry variables (e.g., the performance of the market for 3-year old leased automobiles and the performance of MFL within that industry) which affect the value of the Portfolio. Based on the Model results, RISC assisted the Client in placing a large share of its participation in the Policy.

The Result

Using the Model, the Client was able to underwrite more of the opportunity than it had originally wished to retain thereby allowing it to provide a larger limit to MFL. The transaction was successfully concluded in December of 1998.

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