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[email protected] (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 [email protected]
(Michael Tichareva).
THANK YOU!!!
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