Banking on Risk Management

How actuaries in Australia became an integral part of the banking industry NICK SCOTT

There are about 300 members of the actuarial profession in Australia who select “banking” as their primary interest area, which is just more than 7 percent of the local membership.

The early days of actuaries in banking were very ad hoc, with individual actuaries making their own way. There was no single point of entry. Some carved out a role in the finance function, having worked in capital management for insurers and transferring those skills to banking. Some worked in corporate finance, which has always been a home for a range of quantitative professionals. With the introduction of Basel II, there was a big opportunity for actuaries to help build credit risk models to help banks become accredited as “advanced banks.” Actuaries in both industry and professional services jumped at this opportunity.

The Basel requirements1 and the regulatory bias for internal models from 2005 to just after the 2008–2009 financial crisis opened a path for actuaries in credit and operational risk modeling. The recent focus on stress testing also has provided work for actuaries across risk classes. The “Basel IV”2 move to introduce capital floors and the tilt back to standardized approaches may dampen growth in this space. Banking risk management is still a highly technical area, and even standardized approaches are complex.

Regulation could, of course, be another game-changer in the future. A statutory role may emerge, given the focus by both the government and local regulators on bank pricing and how banks balance the demands of shareholders and customers.

Many of the risk management practices of banks in Australia have been ahead of those for insurers. For example, banks had Basel II before they had Life and General Insurance Capital (LAGIC) requirements, which are local risk-based capital requirements for insurers that are equivalent to Solvency II. Banks also had the Internal Capital Adequacy Assessment Process (ICAAP), as required under the Basel rules and local regulatory standards, before insurers did. Banks were well ahead in terms of stress testing, so in a lot of ways the regulators created the opportunities for the smart numerical risk professionals like actuaries.

As for the near future, alongside risk and capital management, a significant growth area in banking is analytics—customer, behavioral and predicative analytics—that can be used to sharpen up pricing and portfolio optimization. This is the world of big data, and actuaries are very big in this space locally. One large consulting firm has combined its actuaries and its analytics team, and we know that actuaries work in this space at banks—in both mortgage analytics and deposit analytics.

In 10 years, it is possible to imagine that actuaries will be seen as the gold standard professional for prudent bank risk management and the go-to profession for explaining the economics of banking activity and financial strength. As disruption continues across the industry, the core economic function of banking—credit intermediation (the function of connecting savers to borrowers) and maturity transformation (the function of borrowing short-term money like deposits to lend long-term money like home loans)—will be examined by nontraditional players and made more transparent to the market. This should continue to drive demand for banking actuaries.

A Survey of Australian Actuaries in Banking

In 2014, the Australian Institute of Actuaries (the Institute) surveyed actuaries working in the banking sector and followed up with several in-depth interviews. The survey examines backgrounds and pathways into banking, current roles and perceptions, areas of development and future opportunities. Its purpose was to provide a snapshot of actuaries working in the banking sector.

What follows is a presentation and discussion of the survey results. Our objective is to better understand how the profession is faring in the sector and provide a platform for further discussion. The Institute’s Banking Practice Committee (BPC) was established in 2013 as a vehicle for supporting the growth of actuaries in banking, and these results are a small contribution to that effort. (See the “Findings” sidebar for a high-level summary of the survey.)

The survey targeted the 293 members of the Institute (2014) who self-identified as working primarily in banking and make up about 7 percent of all Institute members. Overall, there were 47 respondents, representing 16 percent of the potential member universe, although not all respondents answered all questions.

A Survey of Australian Actuaries in Banking: Key Takeaways

Actuaries are working in a range of banking roles: front-office investment banking (19 percent), middle-office finance (17 percent) and credit risk-related roles (19 percent). Banking actuaries come from a diverse range of backgrounds—mainly life and general insurance (38 percent)—and a strong emerging segment of actuaries with careers starting in banking (21 percent)…

The first question established the distribution of the number of years worked in the banking sector. We found an even allocation across the experience brackets, indicating a good mix for the survey results and inferences. More important, it may also imply a healthy distribution of new entrants and seasoned professionals across the sector.

Question 2 focused on the typical practice areas of survey respondents prior to their movement into banking. Overall, it showed a broad mix of backgrounds from traditional (predominately life and general insurance) and nontraditional areas.

Almost half of the respondents with a general insurance background currently are in a credit risk role. Further discussion in interviews revealed that general insurance experience could provide the technical training for the application of statistical and programming techniques in credit risk modeling. Within consulting firms especially, actuaries can move naturally from general insurance projects to bank projects and banking-focused teams.

Overlaying the result with time spent in the banking sector highlights that beginning a career in banking is a relatively new development, with two-thirds of respondents in this category having worked in banking for five years or fewer.

The work categories reported have a high percentage of roles that are management level.

The high combined percentage working in Investment Banking and Markets (29 percent) shows actuaries are active in “front-office” roles as well as the more habitual group service and middle-office roles. At this level, there are a pleasing variety of roles across the highly diverse segments of credit risk and treasury.

The large percentage of members in credit risk roles was expected based on the anecdotal recognition of this area as the more natural crossover point from statistical modeling roles in general insurance.

During our interviews and discussion with banking colleagues, we learned that credit risk modeling is still a relatively nascent field, and actuaries are prominent in thought leadership, framework and process development within banks. The complexity and variety of banking risk exposures and the weight and urgency of regulatory requirements has created a large space for actuaries to build out and develop their careers. The number of actuaries working within treasury is both noteworthy and encouraging. Treasury roles have been more closely aligned with the accounting profession, with its traditional location within Group Finance. Through further discussion, a number of factors were revealed to have driven this development:

  • Since the 2008–2009 financial crisis, treasury management at banks has increasingly focused on liquidity risk modeling, management and pricing, which is a relatively underdeveloped area.
  • Accounting techniques that have a “balance sheet focus” are perhaps less suited to the challenges of stress tests, sensitivity analysis and other quantitative risk measurement techniques applied to liquidity risk and other asset-liability modeling.
  • Recent regulations, such as Basel III, have increased the need to understand liquidity characteristics, and the requirement to hold liquid assets for uncertain future events has increased.

The dominant skills that are applied on a day-to-day basis are the traditional skills of statistical analysis, cash flow and financial modeling, combined with the ability to apply complex judgment.

Overlaying this view with data on “current role” shows a significant number of managers, not unsurprising, using complex judgment within their current roles.


Actuaries are regarded positively within banks, and there is no evidence of any perception issues that are limiting the opportunities of actuaries within banking. Within credit risk, there is some indication that actuaries are perceived as “modelers” as opposed to managers using skills “across the control-cycle.” There is a significant group of actuaries who do not believe their actuarial background is relevant to their colleagues’ perception of their skill sets. This is notwithstanding that actuaries themselves certainly feel particular aspects of their skill sets are relevant on a day-to-day basis. Although strong quantitative skills are seen as a key feature of the actuarial profession, it was noted by some respondents that actuaries were not necessarily “top-of-mind” for quantitative roles.

Current Applications

As a bridging question to future opportunities, we asked what areas of banking are best suited for actuaries. This question allowed multiple responses, so it was broken down into percentage terms of those who actually responded.

Treasury and Product Management and Pricing both scored higher than 10 percent and indicate strong interest in these areas. We suggest treasury is a reflection of the increased regulatory and market focus on funding and liquidity as discussed earlier. Typically an accounting and balance sheet focused role, the demands of a treasury role in banking have clearly changed since the 2008–2009 financial crisis, as indicated by the raft of new regulation by global regulators to improve the liquidity risk measurement and management, controls and systems of large banking groups.

Actuaries have an established role in product pricing in the insurance sector, as that market has seen a significant increase in disciplined pricing techniques over the last decade. Actuaries emerged out of reserving roles to apply statistical techniques to traditional and innovative rating factors to help underwriters manage renewal and new business pricing.

In a similar way, actuaries clearly believe there is scope to apply a similar skill set to banking product pricing. In post-survey interviews, we discussed the application for more high-frequency products in the retail sector and the uses of quality data available in this sector for certain products, such as credit cards, loans and deposits.

Areas for Development

As is often seen in questionnaires and debates on this topic, communication and influencing skills were seen as the top area for development. We judge this to be no different than outcomes observed for traditional practice areas.

Another clear theme was the need for development of specific quantitative skills for banking. Although actuaries are well trained and drilled in financial modeling in the early years of work experience, more banking-specific modeling techniques are lacking from the syllabus. This is an obvious area for improvement in education and continuing professional development (CPD). Like general insurance, inexperienced actuaries can be taught by practicing actuaries at consultancies.

Bank regulation is also a standout area for improvement. There has been significant regulatory change since the 2008–2009 financial crisis, and there is no better time for actuaries to acquire this knowledge and experience. Alongside modeling techniques, it is perhaps the most readily accessible by self-learning and attendance at industry seminars.

Developments related to accounting standards revisions requiring forward-looking credit provisions is another developing area. Challenges of this nature are essentially actuaries’ “bread and butter,” and it is no surprise that actuaries both within consultancies and banks are gaining ground in this area.

Future Opportunities

The final question in the survey was: “Which current issues and challenges faced by the banking sector are best suited for actuaries to respond to?” Though an open-ended question, the results gravitated around two topics: risk management and the Basel capital standards.

Specific topics included stress testing, sovereign and large financial institutions’ credit risk models, and credit provisioning. The results are correlated strongly with the number of actuaries working in these areas and are seen as a response to the weaknesses revealed during the 2008–2009 financial crisis.

Outside of capital management, one interviewee said no profession has stepped forward to “claim the liquidity risk space,” which dominates the Basel III standard. This area could make up a new and distinct branch of the profession, as it requires a deep understanding of the data, products, systems and processes behind all bank products and services.

Some expressed a concern in relation to “overregulation,” balance and reliance on rating agencies, which speaks to the historical challenges between internal disciplines and frameworks and less risk-sensitive regulatory constraints in the insurance sector.

In other areas, several members highlighted the opportunity to apply quantitative pricing models to banking products for the first time. This coincides with the availability of rich data sets across some banking groups and an emerging ambition to leverage the data for competitive purposes.


The survey results in many ways support our own intuitive and basic assumption that actuaries would be working in a range of banking roles, with a slight bias toward credit risk modeling. In the absence of a banking-specific qualification and the wide range of banking roles, no one profession or qualification suite dominates the banking sector in Australia—with the possible exception of the ubiquitous accountant. As there are fewer actuaries generally, there are naturally fewer actuaries working in the banking sector today. Nevertheless, an average participation rate of 7 percent of Institute members in a sector vastly larger than insurance (in people and capital resources) is something that should be the subject of further research and discussion.

The diversity of banking roles occupied by actuaries is healthy and a sign of the wide applicability of the actuarial skill set, experience and ambition of its members. Actuaries are active in client-facing investment banking roles, as well as the wide array of risk and product management roles. The continuous increase in levels of both modeling sophistication and regulatory oversight across banking activities can only be a bullish sign for the profession.

Nick Scott, AIAA, is a consulting actuary with PwC.