The manager of an automobile lending portfolio for non-captive dealers nationwide engaged Corios to optimize their profit & loss (P&L) pricing model. Their business-as-usual model utilized only nine risk tiers, and required roughly 15 minutes to calculate the net present value margin contribution and return on assets (ROA) for each scenario of a single set of assumptions. These limitations kept the pricing team from developing more sophisticated pricing strategies and optimizing for the ideal price structure on a dramatically more segmented portfolio of dealers and loan prospects.
Corios developed an automated approach for pricing P&L modeling that integrated the client’s expanded hierarchical segmentation strategy and underlying warehouse records. The new model allowed their pricing VPs to create thousands of segment-specific P&Ls in under a minute. For each P&L, we developed an optimization approach to identify the ROA-maximizing discount rate on each segment of loans, effectively running hundreds of scenarios on each segment. A simple user interface was implemented, allowing the non-technical financial analysts in the team to run their own assumptions and scenarios without technical assistance.
The financial analysts for the lending portfolio are now able to optimize pricing terms at a more precise, highly segmented point of entry in a dramatically reduced time frame (from hours to seconds). This P&L model enhancement is conservatively estimated to have improved the client’s ROA by several percentage points at the portfolio level.