Corporate report

Business critical models in UK Export Finance

Updated 19 April 2024

1. How does Macpherson define a model?

A model is defined by Macpherson as a mechanism for analysing or investigating some aspect of the real world. It is usually a quantitative method, system or approach which applies statistical, economic, financial, or mathematical theories, techniques, and assumptions to process input data into quantitative estimates. There are typically three parts to a model:

• inputs – in the form of data and assumptions
• a processing component – often through calculations
• outputs – the key figures as well as the risks and limitations of the models

Models generally have structured sets of assumptions that can be varied.

2. How does Macpherson define a model as ‘business critical’?

A business critical model is defined as those where:

• the modelling drives essential financial and funding decisions
• the model is essential to the achievement of business plan actions and priorities
• errors could engender serious financial, legal, reputational damages or penalties

3. Business critical models in UK Export Finance

Business critical model	Brief model description
Pricing Models	UKEF’s suite of pricing models are designed to generate numerical transaction information, including risk-based premium rates, for our products using agreed pricing policies and methodologies that are subject to review by UKEF’s Credit and Risk Committees and HM Treasury.
Claims Provisions Model (to be used for non-Aero)	Designed to calculate provision rates by taking into consideration a range of user inputs, market data, reports, and stakeholder feedback. In use since Jan 2022. This model is used for the calculation of the provision rate for claim loans and impairments.
Aero Provisions Model	Designed to calculate provision rates by taking into consideration a range of user inputs, market data, reports, and stakeholder feedback. In use since Jan 2022. Using the PRISM methodology allow calculation of provision rates for aero facilities, singly or in bulk, which can be used to communicate to external stakeholders. The model also allows users to perform scenario analysis.
Portfolio Risk Simulation Model (PRISM) and Credit Risk Analysis File Transformation Engine (CRAFTE)	PRISM calculates the Expected/Unexpected Losses UKEF may incur in the full horizon. Feeds into Compliance with risk limits set by Treasury, Pricing, Health of portfolio and pricing adequacy, necessary Provisions and potential future Claims. CRAFTE functions as an interface between UKEF’s Central Data Resource data warehouse (CEDAR) and Portfolio Risk Simulation model (PRISM). It reads in CEDAR Download files and converts them into standard Excel files used in the monthly run and vice versa.
RateGen	Generates a chargeable interest rate based on NLF rates/CIRRs.
S&P Ratings (Suite of external models)	External Model. Bought in as foundation for spreadsheets (covering Civil, Aerospace, Banking and Project Financing). UKEF checks S&P’s model and assumptions.
ESRA Model	Used for the risk assessment of the EXIP Short Term cases. The functionality of the model is based on the ESRA Framework that was developed by RAD. It is also used as a database model as it has the capability to save an assessment in the model. The model will import data from the Action Sheet and populate a Commitment Template.
Local Currency Financing Model	Determines currency eligibility for local currency financing.
Persistence and Loss Model	Generates country risk coefficients (persistence of default and loss given default).
Financed Emissions	Used to estimate financed emissions associated with UKEF support. Primarily for the purpose of annual disclosure within UKEF’s TCFD report. Compiles UKEF-attributable financed emissions based either on regional sector emissions factors (PCAF Database), or UKEF-held or customer-reported data.