In April 2018, the Governors of Motability, the Charity, decided to review the Economic Capital methodology used by Motability Operations. This was deferred in May 2018, following agreement with the National Audit Office (NAO) to conduct a study of the Scheme.
The NAO issued its report in December 2018, praising many aspects of the Scheme, and concluding that ‘the Motability Scheme provides an excellent service to its customers.’ It made several recommendations, one of which was that Motability commission external benchmarking on the level of reserves held at Motability Operations.
The Governors of Motability commissioned Oliver Wyman, a global management consultancy, to conduct an independent review of reserves of Motability Operations, following a selection process.
The Oliver Wyman report makes the following findings and conclusions:
- Motability Operations’ overall approach to economic capital, including the confidence interval of 99.99%, is appropriate given its risk profile and vulnerable customer base.
- It recommended adjustments to the quantification of specific elements of the risk framework that were considered to be materially conservative. The areas highlighted relate to recovery assumptions for defaults of the largest institutional counterparties, insurance risk modelling, and the inclusion of planned income as well as losses over the holding period defined in the framework. In aggregate these adjustments are estimated to reduce the economic capital requirement by c£380 to £420 million when compared to the 2018 year end capital requirement - a reduction of 17% on £2,300 million of capital.
- On comparisons with other car leasing firms, the review found that no firm conclusions can be drawn from a benchmarking comparison because of differences in the operating risk and financing models of different firms. But on the basis of Oliver Wyman’s analysis of Motability Operations’ capital requirements they stated that “it does not appear to us to be significantly out of line with those adopted by other car leasing firms once adjusted for estimations of these differences and the recommendations made above”.
- The report also recommended redevelopment of the modelling for residual value risk, using the wealth of data that is now available, and the development of an analytical model for credit risk.
In considering the report’s recommendations, Motability recognises that the level of reserves is a matter of judgement for Motability Operations, taking into account a wide range of factors, including impact on credit rating and on customer prices.
Lord Sterling GCVO CBE, Chairman of Motability, commented:
“The Motability Scheme was founded in 1977 with three guiding principles: service, value for money and sustainability. These principles have stood the test of time, and are key to our future endeavours to enhance the lives of disabled people and their families. We have discussed the review with Motability Operations Group plc, with these principles firmly in mind. We very much appreciate Oliver Wyman carrying out this important review. There are always things to be learned from such a piece of work.”