Portfolio and Transaction Level Analytics
The KRM solution is used by several large insurance companies in the United States and in other countries to perform a wide range of portfolio performance and risk analyses. These companies perform the analyses using both accounting (GAAP and Statutory) and economic measures of book value, periodic income and expense, and credit losses and gains. This allows each company to calculate performance and risk metrics and view the results of the analyses from these alternative viewpoints. For example, required and available capital metrics can be calculated using either an accounting or an economic basis to assess the economic capital results under these alternative approaches.
Specifically, KRM has been used by one large US insurer as the asset projection system for 17 different applications, including several that use multiperiod projections, e.g.
- Bank Asset/Liability Committee including earnings-at-risk and equity-at-risk
- Stat Cash Flow Testing
- RBC C-3 Phase 1
- RBC C-3 Phase III
- GAAP Loss Recognition
- Multiperiod GAAP Income Projections for business planning, including projection of income from the fixed-income derivatives portfolio
- Stress Tests for risk management
- Economic Capital
- Interest rate scenario analysis
- Daily Portfolio Management Risk/What-If Tool (for foreign sub)
- Calculation of partial durations
Chronological stress scenarios can be applied when performing multiperiod portfolio simulations in KRM. The KRM Analytical Engine applies a deterministic chronological risk factor scenario to a single- or multi-period deterministic portfolio simulation that uses an initial risk factor vector value and initial yield curves as the starting point for the simulation. At subsequent points in time, the value of the risk factor vector is changed by application of the component risk factor changes in the chronological risk factor scenario to the initial values of the corresponding components in the risk factor vector to produce a (single) risk factor vector scenario sample path (dynamic scenario) over the simulation horizon. If tenor point risk factors or term structure movement risk factors are defined for a yield curve used in the simulation and the chronological risk factor scenario specifies changes over time for these risk factors, the KRM Analytical Engine will evolve the yield curve to reflect the specified changes in yields.
The KRM Analytical Engine applies the resulting values of the risk factor vector scenario sample path to asset return or arbitrage-free pricing, balance, cash flow, and income and expense models for individual financial instruments in the portfolio to simulate the performance of the portfolio over the specified sequence of time periods. This simulation produces end of period economic values, component cash flow amounts, component income and expense amounts and principal/notional and book balance amounts for each instrument for each simulated time period under the specified risk factor and yield curve scenario. These results are retained in the KRM Database, where they can subsequently be retrieved and analyzed. Depending upon the accounting treatment specified for each instrument, the component income and expense amounts and the book balance amounts for each instrument are produced consistent with financial accounting (FASB or IFRS) or statutory accounting standards.
Forecasted income statements and balance sheets under the specified risk factor and yield curve scenario are produced by accumulating the forecasted monetary amounts for financial products under the scenario to their associated general ledger accounts, and the forecasted monetary amounts for financial products are produced by accumulating the forecasted monetary amounts for the individual financial instruments in the portfolio belonging to each financial product category.
This functionality allows KRM to produce the desired multiperiod valuation and financial and statutory accounting results under stress scenarios.
Kamakura advantage for Portfolio and Transaction Level Analytics
- KRM calculates all cash flows, market values, and income and expense impacts at the individual transaction level.
- KRM also provides extensive credit-risk adjusted analytics at the individual issuer/transaction level, including probability of default, recovery rate (i.e., 1 – loss given default), credit downgrade probability, spread widening risk, risk driver information, etc.
- KRM enables clients to summarize the individual transaction level analytics at virtually any customized hierarchical levels, including sub-portfolio groupings (e.g., asset class) as well as the ‘top of the house’ (i.e., total portfolio).
- KRM clients have the ability to quantify additional strategic/tactical considerations such as concentration risk across virtually an unlimited number of potential sub-portfolio elements (e.g., name, sector, rating, geographic consideration, line of business, responsibility center, counterparty/issuer, etc.).