Actuaries in Wider Fields. Nairobi 2008. ©2006 Deloitte & Touche Actuaries in wider fields 2 What...

Actuaries in Wider Fields.

Nairobi 2008

©2006 Deloitte & ToucheActuaries in wider fields2

•What is an actuary?

•General Insurance

•Banking

•Risk Management

•Workforce modeling

Actuaries in Wider FieldsAgenda


What is an actuary?The traditional view


What is an actuary?The modern view


What is an actuary?An actuary is what an actuary does…

• We do math

• We have business skills

• We have IT skills

• We understand data

•WE ADD VALUE

©2004 Deloitte Touche Tohmatsu6

General Insurance

Financial Condition Reporting (FCR)

IFRS

Jaco van der Merwe20 June 2008

©2006 Deloitte & ToucheActuaries in Wider fields

General Insurance - Brief overview of FCR

What ?

• A proposed regulatory framework for South African Short Term Insurers

• Driven by the FSB

• AIS calibrated the framework

Why ?

• Improve risk management in Insurers

• Align with international risk-based regulatory approaches

• More efficient use of capital



When ?

• Calibration commenced in 2005

• Completed early 2006

• Implementation:– Initially: 2008

– Update: >= 2009

How ?

• Prescribed model (AIS calibration)

• Certified model

• Internal model



How exactly ?• Insurance & Asset risk• Risks:

– Underwriting risk– Reserving risk– Matching & liquidity– Market risk– Credit risk – not explicit

• Features– 1 year horizon– VaR: 98%, 99%, 99.5%– New business– Run-off to ultimate– Advanced Diversification & Correlation allowance

©2006 Deloitte & ToucheIFRS for General Insurers - June 2008 10

General Insurance – IFRS impactPhase II timeline

Discussion PaperExposure

draftFinal

standardImplementation

(earliest)

Publication

End of comment

period

May 2007November

2007Sept 2009? Sept 2010

(+12 months)2012 / 2013

©2006 Deloitte & ToucheIFRS for General Insurers - June 2008 11

General Insurance – IFRS impactThe Proposed Current Exit Value Model• 3 building blocks to measure insurance liabilities :

Explicit, unbiased, market-consistent, probability weighted and current estimates of the contractual cash flows;

Current market discount rates that adjust the estimated cash flows for the time value of money;

An explicit and unbiased estimate of the margin that market participants require for:• Bearing risk (a risk margin); and• Providing other services (a service margin)

Key issues for general insurers

©2006 Deloitte & ToucheIFRS for General Insurers - June 200813

PREMIUM ACQ

D1RMDCF DP

ACQ: Acquisition Costs

DCF: Discounted Cash Flow

SC: Service Cost

RM: Risk Margin

D1: Day 1 Profit

DP: Deferred Profit

General Insurance – IFRS impactPremium Allocation

SC

©2006 Deloitte & Touche

Banking.Actuarial Solutions for BusinessJune 2008

Banking - Value managementThe traditional view

• Traditionally banks have been able to report and monitor their net asset value

Assets

Liabilities

Net Asset Value


Banking - Value managementThe full picture

• Using actuarial techniques banks are able to measure:

• Net asset value, plus

• The value of profits expected to be generated from existing customers, and

• The value of profits expected to be generated from new customers.

NewClients VNB

ExistingCustomers Value of in force

Profit already earned Net asset value

©2006 Deloitte & TouchePresentation name (view/header footer)17

Banking - Value managementProfit measurement

Interest marginThe difference between borrowing & lending

Expense marginThe difference between costs incurred and fees earned

Bad debtsPD & LGD

Tax

Cost of capitalThe cost of holding money to support the business


Banking - Value managementCustomer targeting

-1

1

2

3

4

5

RiskValueProfile/

Value Rating

Definite rejection

Qualified acceptance

Value / Credit Rating CardPer customer

assessment

(Low)

(Low)

(High)

Premium offer

Normal acceptance

(High)0 1 2 3

1

2

3

4

5

Credit

Definite rejection


(Low)

(Low)

(High)

Premium offer

Normal acceptance

(High)

Cre

dit R

isk

-1

1

2

3

4

5

RiskValueProfile/

Value Rating

Definite rejection


Value / Credit Rating CardPer customer

assessment

(Low)

(Low)

(High)

Premium offer

Normal acceptance

(High)0 1 2 3

1

2

3

4

5

Credit

Definite rejection


(Low)

(Low)

(High)

Premium offer

Normal acceptance

(High)

Cre

dit R

isk

The sweet spot


• Our experience has shown that there is often a term structure to default rates

Banking - credit impairmentProbability of default

Default Rate by Duration

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1 1.5 2 2.5 3 4 5 6 7 8 9 10

Yea

rs f

rom

in

cep

tio

n


Our credit impairment modelBehavioural analysis• Behavioural analysis is key to the accuracy of the expected cash flows projected

– Lump sum early settlements

– Behavioural instalments

– Rolls out of default

• Revolving credit facilities are particularly tricky– Requires establishment of priority of payment rules

0

50,000

100,000

150,000

200,000

250,000

0 5 10 15 20 25

Years

Loan

Out

stan

ding


Risk Management


Risk Management

• What do actuaries know about risk management?

• Product design

• Underwriting

• Matching of assets and liabilities by nature, term etc.

• Prudence and other capital requirements

• Reinsurance

• Traditionally ERM has not been seen as an actuarial area

• Focus on Operational Risk

• But expanding

• More quantitative

• Collision!

Actuaries in wider fields22


Risk Management

• Response from the profession

• IAA Enterprise & Financial Risks Committee

• IAA ERM webinars and programs

• Institute&Faculty: FIRM working group set up

• ST9 from 2010

• Practical manifestations

• New generation risk based capital requirements

• Simple accounting ratios

• Formula based on risk sensitive parameters

• SA, Mauritius (2007)

• Integrated measurement and management: UK ICAS and now Solvency II

Actuaries in wider fields23


• Risk management is at the core of Solvency II

– Risk based capital calculated in Pillar 1 for underwriting risk, market risk, credit risk and operational risk

– Robustness of risk management framework considered in Pillar 2 with potential capital charge for other risk classes including group and strategic risk

– Transparency of the risk management framework through Pillar 3

• Management is different to measurement!

– Holding additional capital is not the only answer to dealing with risk

– A backroom model that calculates capital requirement will NOT be acceptable to regulatory authorities

– Must be a ‘live’ system embedded in risk management processes and management information systems of company

The importance of risk management

Underwriting Risk

Investment Risk

Credit Risk

Liquidity Risk

Operational Risk

Pillar 1Minimum Standards

Regulations on minimum capital

requirements

Reserving

Investment

Pillar 2Supervisor Review

Regulations on financial services

supervision

(Capabilities and

powers of regulators, areas of

activity)

Pillar 3Market Discipline

Transparency

Disclosure requirements

Competition related

elements

SOLVENCY II

Risk

Manag

emen

t

Enterprise Risk Management

Strategic Risk Management

Risk management culture

Ris

k C

on

trol

Pro

cess

es

Extr

em

e

Even

ts

Man

ag

em

en

t

Ris

k &

E

con

om

ic

Cap

ital

Mod

els

Rating agencies Standard & Poors, Moody’s and Fitch have indicated that they will consider the effectiveness of an institutions enterprise risk

management explicitly in their rating approach.

Strategic Workforce PlanningA statistical approach to human capital planning

Ashleigh TheophanidesActuarial & Insurance Solutions at DeloitteApril 2008

Strategic Workforce Planning

A statistical approach to human capital planning

©2006 Deloitte & ToucheStrategic Workforce Modelling26

The world around us….

These statistics illustrate that there is a battle for brainpower…


The problem…

• A company needs to ensure that it has a sufficient supply of the required skills that it needs a to meet its business objectives.

• This may seem simple

…or is it?

What will the effect of globalisation and emigration have?

What will the effect of globalisation and emigration have?

Considering the impact of staff movements,

trends in skills movements, the effect of the

ageing population, the effect of exogenous factors like HIV/AIDS

and other diseases compounds the issue.

???

Are there sufficient resources for the

Specific skills in the market now.


Statistics – using predictive modelling

• Human capital is regarded as a significant asset in businesses today

• Workforce planning models facilitate a more scientific approach to managing the human capital needs of an organization

• Predictive Workforce Modeling allows an organisation to:

– Consider what its staffing needs are going to be in the future

– Project its expected supply of staff in the future

– Identify shortages or surplus of staff for these years (GAP)

– Put plans in place to satisfy the Human Capital needs that are expected to arise.

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Actuaries in Wider Fields. Nairobi 2008. ©2006 Deloitte & Touche Actuaries in wider fields 2 What...

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