From Mortality to Mortgage: Expanding Actuarial Skills in Banking

Estimated reading time: 5 minutes

The banking sector presents a compelling alternative career path for actuaries looking to apply their quantitative skills and risk management expertise beyond traditional insurance roles. As banks navigate increasingly complex regulatory requirements and risk management challenges, the demand for actuarial expertise in banking has grown significantly. This shift presents new opportunities for actuaries to expand their horizons and create meaningful impact.

The 2008 financial crisis underscored the need for robust risk management systems to mitigate reckless risk-taking that accumulates over time, only to unravel due to external triggers. This realization led to the introduction of risk certifications such as the Chartered Enterprise Risk Actuary (CERA) and Financial Risk Manager (FRM) designations. The South African Actuarial Society (ASSA) has been a strong advocate for actuaries in banking, and both the Institute and Faculty of Actuaries (IFoA) in the UK and ASSA have established banking fellowship pathways. Moreover, IFRS 9 modeling for Expected Credit Loss (ECL) has opened up opportunities for actuarial consultants not just in banking, but also in leasing and insurance companies.

Actuaries should not wait for another financial crisis to catalyze their entry into banking. Risks today are increasingly multifaceted, spanning digital transformation, climate change, and emerging financial threats. Proactive risk management is essential-focusing on foresight rather than hindsight. Beyond risk mitigation, actuaries can also drive revenue growth by enhancing banking products, optimizing profitability, and incorporating customer insights into strategic decision-making.

The Value Addition of Actuaries in Banking

Wholesale Banking and Credit Portfolio Management

Actuaries can play a crucial role in developing sophisticated approaches to credit portfolio management. Their expertise in modeling dependent events is invaluable for assessing portfolio-level risks and correlation effects. By developing models that capture both idiosyncratic and systematic risk factors affecting corporate loan portfolios, actuaries help banks optimize capital allocation and portfolio composition.

Risk Management and Model Development

Actuaries' deep understanding of statistical methods and long-term risk assessment makes them well-suited for roles in credit risk modeling, asset-liability management (ALM), and capital adequacy assessment. Their rigorous training in probability and statistics aligns with the sophisticated modeling needs of modern banking. Moreover, actuaries can ensure artificial intelligence (AI) and machine learning models used in credit scoring, fraud detection, and customer segmentation remain interpretable and aligned with risk management principles.

Capital and Liquidity Management

Capital management in banking requires sophisticated approaches to balance sheet optimization. Actuaries can contribute by developing dynamic capital allocation models that consider regulatory requirements, economic capital, and return objectives. Similarly, liquidity risk quantification benefits from actuarial expertise, particularly in developing internal pricing frameworks that properly reflect liquidity and interest rate risks.

Operational and Climate Risk Quantification

Actuaries can enhance banks' operational risk measurement by applying extreme value theory and other statistical techniques to model tail events. Their experience with claims modeling in insurance offers valuable insights for estimating operational loss severities and frequencies. The growing importance of climate risk in banking also creates opportunities for actuaries to apply catastrophe modeling techniques to assess climate-related risks in loan portfolios and business operations.

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Expanding Actuarial Influence in Banking

Behavioral Modeling and Credit Risk

Actuaries’ experience with policyholder behavior modeling in insurance translates well to banking, where understanding customer behavior for products with embedded options (e.g., prepayment rights) is crucial. Additionally, actuarial expertise in mortality and morbidity analysis is applicable to modeling default probabilities and loss given default scenarios, strengthening credit risk models used in loan underwriting and portfolio management.

Asset-Liability Management and Regulatory Compliance

ALM challenges in banking-matching long-term assets with liabilities, managing interest rate risk, and ensuring adequate liquidity-mirror similar challenges in insurance. Actuaries’ experience in duration matching and cash flow analysis makes them valuable in bank treasury and ALM departments. Furthermore, Basel regulations have increased the demand for actuarial skills in banking, particularly for advanced measurement approaches in operational and credit risk modeling.

Stress Testing and Scenario Analysis

Actuaries’ ability to model extreme events and financial impacts directly applies to bank stress testing requirements. Their expertise in developing and implementing comprehensive stress testing frameworks helps banks meet regulatory expectations while optimizing risk management strategies.

Product Development and Fintech Innovation

Actuaries’ understanding of option pricing and complex financial instruments enables them to contribute to structured product design, derivative pricing, and profitability assessment. Additionally, as financial technology (fintech) reshapes banking, actuaries can leverage their analytical skills to develop and validate algorithms for automated lending, fraud detection, and customer behavior modeling.

Risk Governance and Reporting

Actuaries’ experience in regulatory reporting and communication with senior management makes them well-suited for roles in risk oversight and governance. They can contribute to key banking reports such as:

• Internal Capital Adequacy Assessment Process (ICAAP) reports, which evaluate overall risks and capital adequacy (similar to ORSA reports in insurance).

• Internal Liquidity Adequacy Assessment Process (ILAAP) reports, which detail liquidity risk assessment and management.

• ALM reports that provide critical insights into balance sheet risk management.

Challenges to Actuarial Penetration in Banking

Despite the numerous opportunities for actuaries in banking, their presence in the industry remains limited. Historically, the actuarial profession has been closely tied to insurance and pensions, only expanding into general insurance over the past few decades. Unlike insurers, banks have not traditionally relied on actuaries, making it necessary for actuarial professionals to actively demonstrate their value to senior banking executives.

Other challenges include:

• Competition from other quantitative professionals: Fields such as financial risk management (FRM), chartered financial analysis (CFA), quantitative finance, and data science also provide pathways into banking risk management.

• Cost considerations: Actuaries often command high fees, making banks hesitant to hire them when other professionals with overlapping skill sets may be more cost-effective.

• Inertia in career transitions: Many actuaries remain in insurance due to strong demand and a stable career path, reducing the supply of actuaries willing to explore alternative roles.

Conclusion

The banking industry presents a wealth of opportunities for actuaries to diversify and apply their expertise in new and impactful ways. From credit risk and capital management to product development and ESG integration, actuaries can play a crucial role in shaping banking strategies that balance risk, profitability, and innovation. Banks are often significantly larger and more financially impactful than insurers, meaning actuarial penetration into the sector has immense potential-provided actuaries can navigate existing barriers to entry.

By embracing the challenges and opportunities of the banking sector, actuaries can expand their professional horizons and drive meaningful change in the financial services industry.