Actuaries in Wider Fields .

1. Actuaries in Wider Fields. Nairobi 2008

2. Actuaries in Wider FieldsAgenda • What is an actuary? • General Insurance • Banking • Risk Management • Workforce modeling Actuaries in wider fields

3. What is an actuary?The traditional view Actuaries in wider fields

4. What is an actuary?The modern view Actuaries in wider fields

5. 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 Actuaries in wider fields

6. General Insurance Financial Condition Reporting (FCR) IFRS Jaco van der Merwe 20 June 2008

7. 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

8. General Insurance - Brief overview of FCR When ? • Calibration commenced in 2005 • Completed early 2006 • Implementation: • Initially: 2008 • Update: >= 2009 How ? • Prescribed model (AIS calibration) • Certified model • Internal model

9. General Insurance - Brief overview of FCR 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

10. General Insurance – IFRS impactPhase II timeline Exposure draft Final standard Implementation(earliest) Discussion Paper Publication End of comment period May 2007 November 2007 Sept 2009? Sept 2010(+12 months) 2012 / 2013 IFRS 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) IFRS for General Insurers - June 2008

12. Key issues for general insurers

13. General Insurance – IFRS impact Premium Allocation PREMIUM ACQ DCF SC RM D1 DP ACQ: Acquisition Costs DCF: Discounted Cash Flow SC: Service Cost RM: Risk Margin D1: Day 1 Profit DP: Deferred Profit IFRS for General Insurers - June 2008

14. Banking. Actuarial Solutions for Business June 2008

15. Banking - Value managementThe traditional view • Traditionally banks have been able to report and monitor their net asset value Assets Liabilities Net Asset Value

16. 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. Actuaries in wider fields

17. Banking - Value managementProfit measurement Interest margin The difference between borrowing & lending Expense margin The difference between costs incurred and fees earned Bad debts PD & LGD Tax Cost of capital The cost of holding money to support the business Presentation name (view/header footer)

18. Value / Credit Rating Card Value / Credit Rating Card Per customer Per customer assessment assessment Value Rating Value Rating / / Credit Credit Value Value 2 2 3 3 0 0 - - 1 1 1 1 Risk Risk Profile Profile (Low) (Low) (Low) (Low) (High) (High) (High) (High) 1 1 1 1 (Low) (Low) (Low) (Low) 2 2 2 2 Definite rejection Definite rejection Definite rejection Definite rejection Credit Risk Credit Risk Qualified acceptance Qualified acceptance Qualified acceptance Qualified acceptance 3 3 3 3 Premium offer Premium offer Premium offer Premium offer 4 4 4 4 Normal acceptance Normal acceptance Normal acceptance Normal acceptance 5 5 5 5 (High) (High) (High) (High) Banking - Value managementCustomer targeting The sweet spot Presentation name (view/header footer)

19. Banking - credit impairmentProbability of default • Our experience has shown that there is often a term structure to default rates Presentation name (view/header footer)

20. 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 Presentation name (view/header footer)

21. Risk Management Actuaries in wider fields

22. 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 fields

23. 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 fields

24. Strategic Risk Management Risk Control Processes Extreme Events Management Risk & Economic Capital Models Risk management culture The importance of risk management • 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 SOLVENCY II Pillar 3 Market Discipline Transparency Disclosure requirements Competition related elements Pillar 1 Minimum Standards Regulations on minimum capital requirements Reserving Investment Pillar 2 Supervisor Review Regulations on financial services supervision (Capabilities and powers of regulators, areas of activity) Underwriting Risk Investment Risk Risk Management Credit Risk Liquidity Risk Operational Risk Enterprise Risk Management 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.

25. Strategic Workforce Planning Strategic Workforce Planning A statistical approach to human capital planning Ashleigh Theophanides Actuarial & Insurance Solutions at Deloitte April 2008 A statistical approach to human capital planning

26. The world around us…. These statistics illustrate that there is a battle for brainpower… Strategic Workforce Modelling

27. 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? Are there sufficient resources for the Specific skills in the market now. 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. Strategic Workforce Modelling

28. 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. Strategic Workforce Modelling