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mtichareva@NatStandard.com (Michael Tichareva).

ACTUARIES IN

BANKING

HOW ACTUARIES ARE INNOVATING

By Michael Tichareva

FASSA, Bcom (Hons), MBA

IAA Banking Working Group Chairperson

ASSA Banking Committee Chairperson

ASSA Education Board Chairperson

National Standard Finance Africa Managing Director

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

Specifying the

Problem

Developing the

Solution

Monitoring the

Experience

Professionalism

The General Commercial & Economic Environment

1

TRADITIONAL

ACTUARIAL

FIELDS

2

AN ACTUARY’S SKILL-SET

RISK MANAGEMENT

STATISTICAL & FINANCIAL MODELLING

PROFESSIONALISM

BUSINESS ANALYTICS

QUANTITATIVEDECISION MAKING

ECONOMICS

COMMUNICATIONSTAKEHOLDER MANAGEMENT

3

THE NEED FOR ACTUARIES IN BANKING

Credit ScrorecardDevelopment

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

Insurance Banking Equivalent

Probability of a Claim Probability of Default (PD)

Sum Insured/Assured Exposure at Default (EAD)

Loss Incurred divided by Sum Insured Loss Given Default (LGD)

LIFE ASSURANCE BANKING - EQUIVALENT

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EXPECTED LOSS METRICS: PRACTICAL APPLICATION OF IMPORTED ACTUARIAL PRINCIPLES

• EL = PD * LGD * EAD

1. Rating scorecard(application or behavioural)

(regression – linear or non-

linear)

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)

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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%

Credit Granting Considerations

• Profitability of the route

• Suitability of the vehicle

• Credibility of the owner

• Credibility of the Taxi Association

Chief Risk Officer

Actuary

Dawie Spangenberg

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

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Proprietary Telematics Data and

Analytics, providing critical insight

for risk management and business

decisions

Innovative funding leading to:

• Diversified & engaged Debt investors

• Judicious risk mitigation

• Optimal capital structures

CASE STUDY: LESSONS LEARNT FROM ABIL

REMEDIAL ACTIONInclusion of an Actuary (Peter

Temple) on the Board & on the

Group Risk & Capital

Management Committee.

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

HOW ABIL FAILED1. 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

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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

Richardt Hechter (ASSA)

Vitality Group

South AfricaKudzai Chigiji (IFoA)

Data Analytics: Digital Research & Development Team

WesBank

South Africa9

Garry Smith (IFoA)

Banking Consulting Actuary

UK

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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!

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

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Q&A SESSION

For further engagement with the Speaker, write to mtichareva@NatStandard.com

(Michael Tichareva).

THANK YOU!!!

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