Actuarial Field at Symbiosis of Banking and Insurance (Part 1)

Estimated Reading Time: 7 minutes

Introduction

In this three-part article series, we explore the synergies between banking and insurance from an actuarial perspective. Specifically, we examine how actuarial skillsets developed in insurance can be effectively applied in banking and what actuaries working in insurance can learn from banking methodologies in return. The concept of symbiosis is central to our discussion, as we argue that these two fields can co-exist and enhance one another through shared quantitative frameworks.

Our core reference is the IAA Banking Forum’s comprehensive report titled “Opportunities for Applying Actuarial Techniques in Banking” (July 2021). We structure our series as follows:

1. Part 1: Key similarities in actuarial skillsets across banking and insurance

2. Part 2: Additional synergies in practice areas and regulation

3. Part 3: Cross-industry lessons for actuaries from both sectors banking and insurance

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Similarities Between Actuarial Skillsets in Banking and Insurance

In credit risk modeling, actuaries will encounter new terminology, but many of the concepts are already familiar. Probability of Default (PD) is conceptually similar to claim frequency, and Loss Given Default (LGD) is similar to claim severity. Credit risk assessment corresponds to underwriting. In retail banking, credit scorecards function like underwriting criteria in general insurance, and for loan portfolios, the cumulative default rate is akin to the inverse of a survival rate.

Provisioning for credit losses under IFRS 9 is analogous to claims reserving under IFRS 17. Both frameworks encourage earlier recognition of losses and result in lower first-year profitability. Similarly, the Asset-Liability Committee (ALCO) in banks plays a role comparable to that of asset-liability management teams in life insurance companies.

Revolving credit products, such as credit cards, share features with variable benefit limits in general insurance. Enterprise Risk Management (ERM) frameworks also align closely. In banking, ICAAP (Internal Capital Adequacy Assessment Process) and ILAAP (Internal Liquidity Adequacy Assessment Process) are equivalent in purpose to insurance’s ORSA (Own Risk and Solvency Assessment). Both Basel III and Solvency II use a three-pillar structure that addresses minimum capital requirements, supervisory review, and public disclosure. Both allow for either standardized or internal model-based capital assessments, subject to regulatory approval.

Banking and insurance each offer a mix of long-term and short-term products. In banking, current accounts and credit cards can be long-term in economic behavior, while mortgages are long-term by contractual design. In insurance, life and pension products serve as the long-term equivalents. Evaluation methods in banking, such as Net Present Value (NPV) and Discounted Cash Flow (DCF), are familiar tools for actuaries. These can be extended further using actuarial techniques such as lapse modeling, embedded value analysis, and economic scenario generators.

Actuaries can contribute meaningfully to capital modeling in banking. Pillars 2A and 2B require expert judgment and complex modeling under uncertainty, which actuaries are well trained to handle. Actuarial input in capital adequacy assessment and balance sheet management can enhance banking practices in much the same way it supports insurance operations. The underlying principles and objectives are aligned.

Profit Testing in Retail Banking

Given the complex pricing structures of some retail banking products, and the need to make judgements about a number of factors, assessment of the profitability of retail banking products is an interesting exercise for actuaries; particularly those already familiar with analysis of the pricing and profitability of long-term life insurance and pensions products.

Within retail banking, current accounts (which have no fixed term) enable banks to establish long-term relationships with their customers and provide opportunities for them to cross-sell other products to their customers. Among personal current accounts (PCAs), the most popular product offers ‘free’ banking or, more correctly, ‘free-if-in-credit’ banking.

An assessment of the profitability of PCAs is not straightforward. To quantify expected income, it is necessary to make judgements about the future behavior of customers using the accounts (including their use of overdrafts), the likely term of the accounts and the likely extent of cross-selling. To quantify expected costs, it is necessary to make judgments about the allocation of shared costs (which can be large) and about the determination of funding costs (using funds transfer pricing methodologies).

In a number of other retail banking products, it is normal practice for UK banks to offer better prices for new customers, that is, to use ‘front book’ and ‘back book’ pricing. In deposits, prices are often reduced after one or two years, and may subsequently be reduced further. The UK regulator has estimated that major banks with established PCA businesses and extensive branch networks have retail funding costs that are close to half those of other banks. Credit cards are widely offered on the basis of 0% interest for an initial period, which have been as long as three years.

In mortgages, it is normal for lenders to offer low fixed-rate periods followed by reversion to their standard variable rate (SVR). So, in assessing the profitability of these products, a key issue is to make sound judgements about the extent to which groups of customers will stay with their providers despite the move to worsen prices after initial periods, or will switch to other providers to obtain their better prices for new customers. Assessing profitability in such cases requires a clear understanding of customer retention and switching behavior.

Profit testing and sensitivity analysis are important processes in the pricing of banking products, especially when products are priced for risk. There are parallels with equivalent processes in pricing insurance products. In banking, actuaries can contribute to setting assumptions and applying discounted cashflow techniques in pricing products and analyzing their profitability.

Profit testing and sensitivity analysis are essential in banking, especially for risk-based pricing. These processes mirror those in life and general insurance. Actuaries can provide value by setting realistic assumptions, performing scenario analysis, and using discounted cash flow models to assess profitability under varying conditions.

Application of Survival Models to Credit Risk

Credit risk modeling, particularly for expected credit loss (ECL) under IFRS 9, creates opportunities to apply survival models and other actuarial techniques. A loan portfolio naturally declines over time as loans mature, are repaid, or default. The modeling of PD over time can use a two-state Markov model, with active and default states. The probability of transition from active to default can be derived using actuarial survival analysis, similar to mortality modeling in life insurance.

Lifetime PD for a loan group can be derived through integration, while one-year PDs are obtained by evaluating transitions within specified intervals. These techniques allow for dynamic modeling of credit portfolios and support more accurate and forward-looking provisioning strategies.

Conclusion and Last Words

This part of the article has demonstrated that actuarial skillsets are not only relevant but directly transferable between insurance and banking. From reserving and capital modeling to survival analysis and profitability testing, the fundamental tools actuaries use daily can be adapted to banking contexts with minimal adjustment. The structured, analytical approach that defines actuarial work adds rigor to financial risk assessment in both sectors.

Actuaries working in insurance have much to contribute in banking environments, particularly as regulatory frameworks evolve and banks seek more sophisticated approaches to risk management and financial modeling. Banking presents an opportunity for actuaries to apply their training in areas such as credit risk, product development, and balance sheet strategy. With growing interest in integrated financial services and cross-sector expertise, actuaries who understand both insurance and banking can play an increasingly central role in financial decision-making.

About the authors

Syed Danish Ali is an actuarial consultant with 15 years’ experience across multiple global markets; certified in predictive analytics (iCAS) and graduate of University of London.

Michael Ticherava is a senior actuary specializing in banking and investments alongside interests in insurance, pensions, healthcare, and social security. He has a career spanning over two and a half decades in financial services. He combines actuarial expertise, investment banking, entrepreneurship, and socio-economic development through his various leadership roles globally, and is an advocate for Impact Investing and Conscious Capitalism.