Banks turn to actuarial skills to mitigate risk

Involving actuaries in traditional banking business is a new trend sparked mainly by regulatory reform initiatives such as the introduction of the Basel II banking regulations. These regulations set out minimum capital requirements for banks to ensure the

Michael Tichareva, chairperson of the Banking and Finance Committee of the Actuarial Society of South Africa, says while the majority of actuaries are still employed mainly in the areas of long- and short-term insurance, healthcare, investments and retirement benefits, banks are increasingly recognising the value of using actuaries for their unique modelling, projection and risk management skills.

These actuarial skills, he adds, are especially valuable for banks as they develop and implement economic capital management and risk adjusted performance measurement frameworks.

The implementation of Basel II by South African banks has seen actuaries playing a critical role in developing and reviewing banking models required by the regulator, according to Tichareva.

“It is not unthinkable that in the future the implementation of capital solvency regulations by banks could be overseen by actuaries on an ongoing basis”, says Tichareva.

“As the regulatory landscape continues to change, this could even involve the introduction of a statutory actuarial function for banks in South Africa. But obviously this would have to be driven by the banking regulator.”

Currently only life companies and short-term insurers are legally obliged to employ a statutory actuary who is tasked with ensuring proper financial management by long- and short-term insurers to protect policyholders.

Tichareva says although the South African banking industry did not suffer any casualties as a result of the global credit crunch, appointing statutory actuaries to ensure proper financial risk management by banks would greatly assist in mitigating risks on an on-going and sustainable basis.

Tasked with developing and promoting the actuarial profession in the banking sector, Tichareva’s committee is also in the early stages of investigating the possibility of introducing a Banking and Finance Fellowship subject for South African actuaries. “Such a qualification already exists in Britain, the Australians are investigating the same, and we see major benefits of introducing it in South Africa,” says Tichareva.

Currently the Society’s Fellowship subjects focus on the more traditional actuarial practice areas of long- and short-term insurance, healthcare and retirement benefits.

Tichareva points out that the introduction of a Banking and Finance Fellowship subject would complement the Chartered Enterprise Risk Actuary (CERA) qualification introduced by the Society last year. Actuaries with this internationally recognised qualification have sought after skills enabling them to devise and implement effective risk management strategies across organisations.

Currently only a handful of actuarial organisations around the world are authorised to award the CERA credential. The Actuarial Society was one of the first to introduce the qualification.

Tichareva says banking bailouts in recent years have cost taxpayers around the world trillions, highlighting the need for much improved risk management at banks.

“A sound banking system is one of the cornerstones of a stable economy and a country’s financial markets,” says Tichareva. “Since risk management is a key component of an actuary’s skills set, banks have increasingly been looking towards the actuarial profession to provide the resources needed to accurately assess risk in banking and finance and implement the necessary controls.”

Lee Bromfield, deputy chairperson of the Banking and Finance Committee and a segment Head of Credit at one of South Africa’s big four banks, says increasingly banks are recognising that gaining a deep understanding of their customers will not only help mitigate risk, but also provide them with the edge in a highly competitive environment.

“Part of an actuary’s job is to make financial sense of the future,” says Bromfield. “In banking those who best model the customer will own the profit streams.”

For this reason, explains Bromfield, his bank has pro-actively started hiring actuaries.

“We currently employ 14 qualified actuaries and some 100 student actuaries. We have two actuaries in CEO positions, four actuaries as heads of credit and another four in other executive committee positions ranging from pricing to analytics.”

Bromfield says considering that the average retail bank has more than 5 million customers, the number crunching potential for actuaries is unlimited.

“Just imagine the richness of information available on the transactional history of a client. As an analyst you want to work where there is lots of data as this allows you to apply almost any quantitative skill imaginable. There are also endless behavioural patterns to model and because this is a growing field there are few set guidelines to follow. Actuaries are being given the opportunity to innovate in this space,” says Bromfield.

He says given worldwide regulatory pressures in the banking space, actuaries are sought after to build cutting edge models to optimise the risk environment and to work on the forefront of policy development.