P&L Explain Enhancement

Initial Situation

A large German asset manager operates an internal market risk model as a service for an associated insurance company subject to regulatory requirements (Solvency II). This includes the regular calculation of valuation and risk figures from group down to portfolio level. Moreover, this service shall identify and analyse the main drivers for risk and P&L contributions. In particular, the P&L explain proved to be time-consuming and prone to errors, as well as limited in its informative value.

Project Scope

  • Further development of the existing P&L Explain improving the efficiency in analysing valuation and risk figures along the portfolio hierarchy (top-down approach).
  • Extend the analyses by defined sets of quality tests to efficiently eliminate any data problems that may arise and the associated difficulties in explaining the P&L changes.

Our Contribution

  • Provide technical conception of the P&L Explain for all hierarchy levels including definition of relevant sensitivities for selected risk parameter universe.
  • Support the technical implementation in the company’s systems including:
    • Calculate individual contributions to the change in P&L.
    • Aggregate P&L figures along the valuation hierarchy.
    • Provide hypothetical portfolio valuations based on historical scenarios.
  • Define, implement, and test top-down checks for the P&L Explain metrics introduced.

Customer Benefit

Improved drill-down functionalities for P&L and risk along the various hierarchy levels allow for the quick identification of significant P&L contributions and thus a targeted top-down analysis of value drivers and associated risks. Furthermore, the quality checks introduced help to reduce errors in the evaluations. As a result, the efficiency of the P&L analyses has been improved. Furthermore, the informative value of the P&L Explain has also been increased.

Relevant Skills/Tools

  • Microsoft SQL
  • Tool for Oracle Application Developer (TOAD)
  • IBM Algorithmics RiskWatch
  • IBM Algorithmics One-Algo Risk Application (ARA)

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