Introduction by Robert L. Brown
In researching the articles in this issue of The Actuary, I was pleasantly surprised to find that the country with the longest history of actuaries in banking was South Africa. So, after some debate, I decided to track down the local industry experts to find out more about these industry architects. I was referred to Michael Tichareva, who works in infrastructure project finance, and Rolf Van Den Heever, who works in the treasury department of one of the regional banks, Barclays Africa Bank Limited. Michael had already agreed to write the article “Specialized Growth,” so I turned to Rolf to get his story. Luckily, he obliged, and his story goes like this:
A number of key events and experiences have led to my development and contribution to the local profession. I’ve chosen to highlight a few in this article.
The Early Years
My mom was a mathematics lecturer and my dad was a computer science professor. They introduced me to mathematics, and this interest prompted me to study actuarial science.
I completed my master’s degree at the University of Pretoria. The actuarial school is very good. The accounting, finance, mathematics and statistics subjects applied in a forward-looking control cycle provide a toolbox that can be applied in many different disciplines. This toolbox paved the way for me to work in different industries. One tool in particular, collective risk models, allowed me to explain portfolio frictions and areas of optimization to my clients. (Basically, I could use the tools to quantify risks in the portfolio, such as credit, market and operational risk, and then identify the cost of the risk versus the return provided by the portfolio. Areas with higher levels of returns and lower levels of risk were clear winners, but often risk management techniques also helped to reduce the level of risk, thereby increasing the economic profit.)
I took a gap year after completing my studies and then returned to the university as a lecturer. Consulting in my spare time, I performed reserving exercises and was offered an analytics role by one of my clients, Hannover Reinsurance. While at that company, I qualified as a general insurance fellow of the Institute of Actuaries. At the reinsurance firm, we developed value-add opportunities for our underwriting agencies and did a lot of pricing support work. I then moved to London, England, and joined the consulting firm Deloitte and worked as a London market reserving actuary. My time with the Deloitte teams that consulted with and provided risk assessments to banks, building societies and housing associations led to my transition from general insurance to banking, with a focus on quantitative risk and finance.
Entering the Banking World
Next, a headhunter recruited me to lead the capital management team for a new investment banking startup back home—Absa Capital, a division of Absa Bank Limited and my current employer today. It has been five years since I joined the group treasury function, and what a time it has been. I still do a substantial amount of board and senior management training, so my lecturing experience is useful, as well as my experience in risk-based pricing, application of the collective risk models in economic capital and application of the control cycle. Currently, I have two areas of focus.
- Balance sheet optimization: This is the portfolio optimization discussion mentioned earlier, focusing on the balance sheet of the bank.
- Capital markets execution: These are the activities performed to source the long-term funding and capital base available to the bank, as well as tackling ever-changing market environments.
In addition, I am the principal examiner for the new banking fellowship provided by the Actuarial Society of South Africa. Through this initiative, we aim to establish a strong actuarial complement for the industry.
While my role is no longer purely actuarial, the actuarial tools I’ve honed are applicable throughout. Many actuaries work in risk departments, and I’ve witnessed the transition of skills into business areas as well. I believe the next step for our profession is to leverage this trend.
As a profession, we need to take great care in the way we communicate to other stakeholders within the banking industry. The traditional actuarial worlds are different from those of banks. For example, insurance actuaries are very comfortable with the uncertainties residing in liabilities; how to identify, quantify and manage the risk inherent in liabilities; and how to match liabilities to appropriate asset profiles to mitigate these risks. From a banking perspective, bankers are very comfortable with the uncertainties residing in assets and how to secure funding, including capital to mitigate the risks. When I moved into banking, I initially struggled to understand this view, having previously focused on liability quantification. As a consequence, I did not appreciate the major concern from a funding perspective: funding running out! The financial crisis changed that lack of knowledge quite quickly.
In addition, strategic discussions, such as ones about capital demand, easily can become very technical. For example, the discussions could detail the methods used to quantify the risks that drive capital demand, but the output of these discussions are not necessarily implemented into business processes, like pricing models. These are areas where I feel actuarial contributions can make a significant difference, provided the actuaries understand where the bankers are coming from, and vice versa.
The transition underway in the profession to a qualification specialty in banking is not perfectly clear-cut. One of our peer banks has had deep actuarial penetration for a number of years now. In addition, the previous chairman of my current employer was exposed to my actuarial peers when the bank started an insurance company, and actuarial involvement grew from there. Actuarial students’ frustration about a clear career path in a bank led to the development of the new “banking” study material, given that the market demand already existed.
A Developing Market
Banking is an important work sector and opportunity for South African actuaries today. But there is still a lot to do, especially as a result of the scrutiny regulators worldwide place on banks.
- Risk and provision assessment requirements are increasing. For example, International Financial Reporting Standard 9 (IFRS 9) requires new methods for the assessment of provisions for impaired assets. The implementation and management of IFRS 9 programs provide significant opportunities for actuaries.
- Capital adequacy assessments and forecasts also are increasingly onerous (similar to Solvency II). The Basel Accord’s second pillar is concerned with statutory review of banks’ Internal Capital Adequacy Assessment Process (ICAAP). This process and its U.S. equivalent, the Comprehensive Capital Analysis and Review (CCAR), provide challenges for banks where actuaries can play a significant role. For example, I was responsible for the generation of the ICAAP document as well as the coordination with the local regulator, the South African Reserve Bank, which conducted the statutory review and evaluation process.
- Pricing tools need to keep up-to-date, especially customer pricing (including whole of life, cross product and marketing spend optimization). Pricing is going through a transformation. The time horizon, customer view, credit quality of the provider, collateral management processes, credit quality of the client and product detail all can be incorporated into pricing. The level of incorporation depends on the elasticity of demand, the level of liquidity in the market and market norms. As these change, the need for actuaries increases. Regulatory changes also may force banks to discontinue certain products, which reduces the need for actuarial input.
- Optimal balance sheet structuring is key in order to manage the regulatory load. In its simplest form, this involves identifying the products and segments that generate value and growing those areas of the portfolio, while managing those areas that destroy value.
- Treasury teams constantly are improving their views of interest rate risk, funding profiles, liquidity risk management as well as capital management.
- I suspect that as actuarial involvement in banking gains traction, actuaries also will be able to branch into the industries served by banks.
My journey in the banking industry reminds me of the early days in general insurance, when actuaries were also foreign commodities. The general insurance market for actuaries has developed significantly since those early days. History might repeat itself.