Source: www.fairisaac.com
Topic: Forecasting
Sort Desciption: 1 800 999 2955 from the US 1 415 472 2211 from anywhere professionalservices@fairisaac.com email www.fairisaac.com Loss Forecasting Methodologies Approaches to Successful Risk Management A Fair Isaac ...
Content Inside: 1 800 999 2955 from the US 1 415 472 2211 from anywhere professionalservices@fairisaac.com email www.fairisaac.com Loss Forecasting Methodologies Approaches to Successful Risk Management A Fair Isaac White Paper September 2003 Loss Forecasting Methodologies Copyright 2003 Fair Isaac Corporation. All rights reserved. 1 Table of Contents Executive Summary . 2 Forecasting Techniques . 2 Net Flow Rate. 2 Vintage loss curves. 3 Score distributions . 3 Multidirectional flow rates. 4 Fair Isaac's Integrated Loss Forecasting Methodology. 4 Conclusion. 5 About Fair Isaac. 6 Loss Forecasting Methodologies Copyright 2003 Fair Isaac Corporation. All rights reserved. 2 Executive Summary The ability to accurately forecast risk can have tremendous benefits to an organization. As new customers are booked as accounts age and as the environment changes the expected losses on a portfolio can vary greatly. Recent regulatory changes combined with increased pressure to accurately predict future earnings have pushed risk management to the forefront of business strategy. Understanding the different methods with which to forecast losses and knowing when to use each method allows for greater control of portfolio management and results in better and more profitable account management strategies. The following paper will discuss the most common approaches to loss forecasting and highlight the benefits and drawbacks to each. Forecasting Techniques There are three common methodologies used for forecasting losses in the consumer finance industry: Net flow rates Vintage loss curves Score distributions These methodologies all have strengths and weaknesses and they rely on different data and operating environments. Following is a description of each technique and an explanation of its strengths and weaknesses. Net Flow Rate A net flow rate is a forecast in which the flow of outstandings from one level of delinquency (lower) to another (higher) is applied to the ...
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