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ACTUARIES IN BANKING HOW ACTUARIES ARE INNOVATING IAA Banking Working Group Chairperson ASSA Banking Committee Chairperson ASSA Education Board Chairperson National Standard Finance Africa Managing Director By Michael Tichareva FASSA, Bcom (Hons), MBA
AGENDA 1. ACTUARIAL CONTROL CYCLE 2. TRADITIONAL ACTUARIAL FIELDS 3. AN ACTUARY S SKILL SET 4. THE NEED FOR ACTUARIES IN BANKING 5. INNOVATION IN BANKING: IMPORTED ACTUARIAL PRINCIPLES 6. EXPECTED LOSS METRICS: PRACTICAL APPLICATION OF IMPORTED ACTUARIAL PRINCIPLES 7. CASE STUDY: SA TAXI SUCCESS STORY 8. CASE STUDY: LESSONS LEARNT FROM ABIL 9. INSIGHT FROM PRACTISING ACTUARIES 10. OBSERVE AND INNOVATE! 11. BANKING FELLOWSHIP SUBJECT (ASSA) 12. Q&A
ACTUARIAL CONTROL CYCLE The General Commercial & Economic Environment Monitoring the Experience Specifying the Problem Developing the Solution Professionalism 1
T R A D I T I O N A L A C T U A R I A L F I E L D S 2
QUANTITATIVE AN ACTUARY S SKILL-SET STATISTICAL & FINANCIAL MODELLING DECISION MAKING BUSINESS ANALYTICS ECONOMICS RISK MANAGEMENT STAKEHOLDER MANAGEMENT COMMUNICATION PROFESSIONALISM 3
THE NEED FOR ACTUARIES IN BANKING Credit Scrorecard Development Credit Risk Modelling Credit Risk Management & Reporting Pricing of all Banking Products (credit & non-credit related) Provisioning & Model Development Balance Sheet Management Capital Modelling Pricing & Trading of Derivative Products IFRS 9: Expected Loss Approach *Historical data *Current Data *Future forecasts Product & Business Development *Optimal Client Value Management Enterprise-wide Risk Management *Operational risk *Market Risk *Interest rate risk *Currency risk *Business risk *And many other risks 4
INNOVATION IN BANKING: IMPORTED ACTUARIAL PRINCIPLES LIFE ASSURANCE BANKING - EQUIVALENT Insurance Probability of a Claim Sum Insured/Assured Loss Incurred divided by Sum Insured Banking Equivalent Probability of Default (PD) Exposure at Default (EAD) Loss Given Default (LGD) 5
EXPECTED LOSS METRICS: PRACTICAL APPLICATION OF IMPORTED ACTUARIAL PRINCIPLES EL = PD * LGD * EAD 1. Rating scorecard (application or behavioural) (regression linear or nonlinear) 2. Roll rate or transition matrix 1. DCF model on recoveries of defaulted assets (retail portfolios) 2. Chain-ladder or run off triangles (unsecured loans) 3. Expert judgement & benchmarks (corporate loan exposures) 1. Utilisation of Credit Conversion Factors estimation *CCF = Defaulted Balance Balance at start of observation period 2. Max(current loan balance: facility limit) 6
CASE STUDY: SA TAXI SUCCESS STORY Financial Metrics Snapshot : 30 September 2016 Headline earnings ZAR 249m (U.S. $20 m) Net asset value ZAR 1,142m (U.S. $88 m) Gross loans & advances ZAR 7.2bn (U.S. $554 m) Number of loans on book 26,352 Non-performing loans 17.4% Credit loss ratio 3.1% Net Interest Margin 11.1% Return on Equity 25.4% Chief Risk Officer Actuary Dawie Spangenberg Proprietary Telematics Data and Analytics, providing critical insight for risk management and business decisions Credit Granting Considerations Profitability of the route Suitability of the vehicle Credibility of the owner Credibility of the Taxi Association Credit risk management: Adheres to set risk appetite and risk strategy Ensures consistent analysis of the existing book and originations Employs a sustainable credit origination and management platform Innovative funding leading to: Diversified & engaged Debt investors Judicious risk mitigation Optimal capital structures 7
8 CASE STUDY: LESSONS LEARNT FROM ABIL HOW ABIL FAILED 1. Directors failed in their fiduciary duties 2. Negligent & reckless business conduct 3. CEO s over-dominance 4. Aggressive accounting policies 5. Poor credit underwriting 6. Understatement of impairments 7. Acquired Ellerines without proper DD 8. Loans to Ellerines 9. Unsustainable funding model 10. Unqualified & alcoholic CRO IMPLICATIONS 1. Sustained losses 2. 5700 jobs at stake 3. Over 13 000 investors lost money 4. Over 3 million customers affected 5. Delisted and De-licensed 6. Placed under Curatorship REMEDIAL ACTION Inclusion of an Actuary (Peter Temple) on the Board & on the Group Risk & Capital Management Committee.
INSIGHT FROM PRACTISING ACTUARIES Ania Botha (ASSA) Associate Director, Financial Risk Management KPMG South Africa Martin Collins (IFoA) Pensions Director, Banking KPMG UK Kuda Mupandawana (IFoA) Pricing Specialist Nedbank South Africa Kudzai Chigiji (IFoA) Data Analytics: Digital Research & Development Team WesBank South Africa Garry Smith (IFoA) Banking Consulting Actuary UK Richardt Hechter (ASSA) Vitality Group South Africa 9
OBSERVE AND INNOVATE! I have noted an interesting point whilst participating in an IFRS 9 impairment project. The prepayments of loan products are mathematically the same as surrenders of savings products of life insurance but the cash flows go in opposite directions. Both specify the maturity of the contracts. And the defaults of loans vs deaths of savings products are comparable even though the correlation of prepayments vs surrenders are different. So actuaries have something to give to the modelling of bank products. Pentti Soininen, Actuary, Solvency Expert, Finland, 22 March 2017 Insight: Application of equation of value principles from life insurance to banking! 10
11 BANKING FELLOWSHIP SUBJECT Part F206 Structure 1) Banking Structure & Banking Marketplace in South Africa 2) Bank Risk Management 3) Bank Asset & Liability Management 4) Bank Strategy & Governance 5) Bank Problem Solving CURRENTLY CONSIDERING BANKING FELLOWSHIP
Q&A SESSION For further engagement with the Speaker, write to mtichareva@natstandard.com (Michael Tichareva). THANK YOU!!! 12