Actuaries are increasingly looking at banking as a new area of work. Around the world, the various actuarial associations and banking jurisdictions are at different stages in recognizing the value of actuaries in banking. We anticipate that the trend will persist and banking will continue to grow as a new practice area for actuaries globally.
Involving actuaries in traditional banking business is a new trend sparked by regulatory reform initiatives, such as the introduction of the Basel II banking regulations. These international regulatory developments introduced aspects of work that actuaries are well equipped to handle. In South Africa, we had foresight and saw the opportunity many years ago—a number of our actuaries already were employed in banking roles before the introduction of Basel II in 2008. Subsequently, when Basel II was introduced, the value of actuaries became even more pronounced.
International Financial Reporting Standard 9 (IFRS 9) on provisioning for bad debts is another area where we believe actuaries are well placed to perform the work that requires a lot of assumptions and judgment in estimating expected credit losses. However, we need to remain proactive and continue driving forward, as we should be shaping the future regulatory landscape through our input as the actuarial profession matures in the banking area.
Actuaries have played a critical role in developing and reviewing banking models required by the regulator in the implementation of Basel II by South African banks. It is quite possible that actuaries could oversee the implementation of capital solvency regulations by banks on an ongoing basis in the future. As the regulatory landscape continues to change, this could even involve the introduction of a statutory actuarial function within banks in South Africa. But, obviously, this would need 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. 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 could greatly assist in mitigating risks on an ongoing and sustainable basis.
Typical Areas of Work
While the majority of actuaries are employed in the areas of long- and short-term insurance, health care, investments and retirement benefits, banks are increasingly recognizing the value of using actuaries for their unique modeling, projection and risk management skills. These actuarial skills are especially valuable for banks as they develop and implement economic capital management and risk-adjusted performance measurement frameworks.
As already indicated, there are many opportunities for actuaries in banking in South Africa. These opportunities are increasing in jurisdictions like Australia, the United Kingdom and North America, and are driven largely by regulatory changes over the past few years, such as Basel II and III. Most recently, changes in international accounting rules that now require a forward-looking expected loss approach to credit loss provisioning (as opposed to incurred loss-based historic approach) also provide more opportunities for actuaries in banking.
The roles actuaries in banking typically hold relate to risk management. This ranges from credit risk, market risk, liquidity risk, operational risk and other business risks. Each of these risks can be broken down further into a breadth of topics. For example, credit risk is a major area of work and can be broken down into loan origination and pricing strategies, monitoring of portfolio trends, provision of capital and reporting. Given actuaries’ quantitative abilities and understanding of the financial world, they are able to play a key role in each of these areas. These roles are not confined to banks. They apply to consulting firms as well. Consultants are able to act in advisory or audit roles. While audit roles often lead to validation of a bank’s model, advisory roles allow actuaries to build up strategies and models with clients (the banks) across the breadth of risk types and topics.
Actuaries working in the banking sector in South Africa are largely employed in the following areas:
- Credit scorecard development
- Credit risk management and reporting
- Design and pricing of all banking products (credit and noncredit related)
- Provision model development
- Balance sheet management (i.e., asset-liability mismatching, risk management and liquidity risk management)
- Pricing and trading of derivative products
Actuaries employed in the risk-consulting field provide risk-consulting services to banks in the following areas:
- Capital modeling
- Credit, operational and market risk modeling
- Balance sheet management
The relevant skills and knowledge for actuaries in these areas include:
- Quantitative and modeling skills, including asset-liability modeling
- Knowledge of nature and pricing of financial and derivative products
- Business and regulatory awareness in the banking sector
Given worldwide regulatory pressures in the banking space, actuaries, among other professionals, are sought after to build cutting-edge models to optimize the risk environment and to work on the forefront of policy development.
Banking Fellowship Subject
Tasked with developing and promoting the actuarial profession in the banking sector, the Actuarial Society of South Africa Banking Committee, which I chair, introduced a banking fellowship subject in 2015 for South African actuaries. We saw major benefits in introducing it, given the rapidly changing banking landscape that requires new and improved risk management skills.
The new banking exam places a strong focus on the management of banking-specific risks, such as credit risk, market and interest rate risk, liquidity risk and operational risk. Balance sheet and capital management, as well as corporate governance and strategy setting in the banking environment, are additional key focus areas. Other important issues, such as banking product design and pricing, also are covered. The banking subject focuses on the application of actuarial concepts learned in foundational and intermediate actuarial subjects to solve complex problems within banking institutions.
The first sitting for the banking subject was in October 2015, when eight students wrote but none passed the exam. At the second sitting in May 2016, 12 students wrote and four passed. The third sitting was in October 2016, where 11 students wrote and two passed. There will be two sittings annually as we move forward. The number writing is not yet a true reflection of the maturity of the actual banking practice area, where we have close to 300 actuarial professionals (about 10 percent of our membership), and this area of practice is growing rapidly. As more students get to this level of the examination process, we expect the number taking the banking fellowship subject to also increase significantly.
This is a major strategic shift for the actuarial profession. Historically, the Actuarial Society’s fellowship subjects focused on the more traditional actuarial practice areas of long- and short-term insurance, health care, retirement benefits and investments. South Africa can now have actuaries who qualify specializing in banking as a practice area, a first in the world. The introduction of a banking fellowship subject also complements the Chartered Enterprise Risk Actuary (CERA) qualification introduced by the Actuarial Society in 2011. Actuaries with this internationally recognized qualification have sought-after skills enabling them to devise and implement effective risk management strategies across organizations.
The Need for Improved Risk Management
Banking bailouts in recent years have cost taxpayers around the world trillions of dollars, 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. South Africa discovered that its own banking system was not infallible when, in August 2014, the South Africa Reserve Bank (SARB) and the other major banks had to step in to rescue African Bank, an unsecured loan lender in the lower-income segment that went under business rescue due to increasing credit losses that had not been adequately provided for. This bank needed fresh capital to survive.
It can be argued that with the new accounting standard, IFRS 9, which has a forward-looking approach to credit loss provisioning, this problem could have been anticipated and provided for well in advance. This also could have led the bank’s executives to change their lending strategies and to increase their loan collection efforts. African Bank has since appointed one of the most senior South African actuaries and business leaders, a former president of the Actuarial Society, to its board in early 2016. This is not to say that this will prevent all problems because there is now an actuary on the board, but it will certainly introduce fresh eyes and thinking on how risks are managed at the bank.
Because risk management is a key component of an actuary’s skills set, banks increasingly have been looking to the actuarial profession to provide the resources needed to accurately assess risk and implement the necessary controls. As noted by Lee Bromfield, former deputy chairperson of the Actuarial Society Banking Committee and former segment head of credit at one of South Africa’s big four banks, “Increasingly banks are recognizing 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.”
Bromfield recognizes that part of an actuary’s job is to make financial sense of the future. This means that as part of risk management in banking, those who best model the customer will own the profit streams. For this reason, the bank for which Bromfield works has been proactively hiring actuaries for a while. The bank currently employs at least 20 qualified actuaries and more than 130 student actuaries. There are a number of actuaries in CEO positions, as heads of credit and in other executive committee positions ranging from pricing to analytics. Bromfield notes that considering the average retail bank has more than 5 million customers, the number-crunching potential for actuaries is unlimited. He imagines the richness of information available on the transactional history of a client. As an analyst, one would want to work where there is a lot of data, as this allows one to apply almost any quantitative skill imaginable.
There also are endless behavioral patterns to model, and because this is a growing field, there are few set guidelines to follow. Actuaries can innovate in this space.
What may distinguish actuaries from other qualifications in managing banking institutions is their strong technical skills in risk management coupled with a deep understanding of business in the financial services sector, as is already incorporated in the actuarial syllabus as a whole. Banking is certainly no different from other financial services organizations in which actuaries have long played a critical role. We believe that, with our unique skills, we have a major role to play in managing banking institutions alongside other professionals and experts.