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Can actuarial expertise extend beyond insurance?

In Part 1, we examined why banking and insurance are far more interconnected than they appear, uncovering common threads in risk management, regulation, and financial decision-making.

If you missed it, you can catch up here: https://www.theactuaryweekly.com/p/actuarial-field-at-symbiosis-of-banking-and-insurance-part-1.

Now, let's take the next step.

This article explores how actuarial methodologies are being applied within banking from expected credit loss modeling and capital adequacy frameworks to customer profitability analysis and what these opportunities mean for the future of the profession.

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 applied in banking and what actuaries in insurance can learn from banking methodologies. The concept of symbiosis is central to this discussion, as both industries can coexist and mutually benefit from shared quantitative frameworks. Actuarial skills serve as a bridge between the two domains, particularly in the areas of risk measurement, product development, and regulatory capital.

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:

Part 1: Key similarities in actuarial skillsets across banking and insurance
Part 2: Additional synergies in practice areas and regulation
Part 3: Cross-industry lessons for actuaries from both banking and insurance sectors

For credit risk, the terminology might be new to actuaries, but probability of default (PD) is analogous to claim frequency and loss given default (LGD) is analogous to claim severity. Credit risk assessment is analogous to underwriting. For retail loans, credit risk scorecards are analogous to general insurance underwriting criteria. For a cohort of loans, cumulative default rate is analogous to the inverse of survival rate.

Provisioning for credit losses is analogous to reserving for claims. IFRS9 requires banks to hold provisions for expected credit losses (ECLs), in much the same way that insurance companies hold claims reserves.

The activities of the asset– liability committee in a bank are analogous to asset–liability management in a life insurance company with few exceptions.

IFRS9 lowers first year equity and profitability (but not ultimate) similarly to how IFRS17 does; speedier recognition of losses.

revolving credit facilities like credit cards is analogous to variable ‘up-to’ benefit limits sum insured in general insurance.

ERM; like ICAAP capital adequacy is similar to solvency reports, FCR reports and ORSA reports; Both Basel 3 and Solvency 2 have three pillars deal with (1) minimum capital requirements, (2) the supervisory review process and (3) public disclosures. Another similarity is that, in quantifying their capital requirements, firms may use either the standardized approach (SA) that is specified in the regulations or, subject to regulatory approval, their own internal models – or a mixture of these approaches.

A further similarity is that, as part of their supervisory review process, firms must make regulatory submissions annually: while insurance companies must make a single submission (ORSA – Own Risk and Solvency Assessment), banks must make two submissions, one for capital (ICAAP – Internal Capital Adequacy Assessment Process) and the other for liquidity (ILAAP – Internal Liquidity Adequacy Assessment Process).; capital modeling to quantify Risk based capital (RBC) regime to quantify various risks such as credit risk, underwriting risk, market risk, operational risk etc. And stress testing and reverse stress testing is to be done in both banks and insurance companies.

Banking has long term products and short-term products just like insurance has; long term products are current accounts, deposit accounts and credit cards due to customer behavior and mortgages due to contractual terms. Insurance has life and pension long term products. Despite the differences between long term bank and insurance, long term bank products are evaluated using Net Present Value (NPV) and Discounted Cash Flow (DCF) models which are not just familiar to actuaries but can be enhanced to quantify further nuances as actuaries have done for life and pension products such as making projected unit count method, lapse modeling, embedded value, economic scenario generators (ESGs) and so on.

The skills and complexities involved in modelling and application of judgment when building internal models and assessing additional capital requirements under Pillars 2A and 2B provide opportunities for actuaries to add value in capital adequacy assessment and balance sheet management of banking institutions in the same way they add value in insurance companies. The principles are similar.

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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.

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.

Credit risk modelling in general, and the calculation of ECLs under IFRS 9 in particular, leads to the application of traditional actuarial science to banking. The volume of a cohort normally declines over time and it is necessary to forecast retention rates. For a cohort of loans, cumulative default rate is analogous to the inverse of survival rate.

Another example in credit risk modelling is the PD at time t or a lifetime PD that can also be modelled based on a survival model (a two-state Markov model), where a loan that survives to time t-1 can default in year t. This is a two-state survival model where the states are default and active. The transition is then defined as moving from active to default.

This gives a lifetime PD for a group of loans and is very useful in IFRS 9 provisioning models. A one-year PD at time t is determined by integrating the equation above between t-1 and t.

As this second part of the series has illustrated, the similarities between insurance and banking extend well beyond terminology. Capital modeling, regulatory submissions, product testing, and credit risk analysis all reflect core actuarial competencies. Banking does not require actuaries to learn entirely new techniques, but rather to translate familiar tools into a new application domain.

Actuaries bring a strong foundation in risk quantification, scenario analysis, long-term projections, and regulatory reporting. These are directly relevant to the challenges faced by banks, particularly in areas such as credit risk management, capital adequacy planning, and retail product profitability. The actuarial skillset is inherently transferable and adaptable, offering both technical depth and commercial insight.

As banks increasingly adopt more sophisticated modeling frameworks, especially under regulatory pressure and evolving market dynamics, the demand for actuarial expertise will likely grow. Actuaries can help build robust internal models, lead profit testing initiatives, and improve the governance of complex financial products. This cross-sector versatility can enhance both institutional resilience and strategic decision-making.

In the final part of our series, we will explore the practical lessons that insurers can learn from banking, and what banking can adopt from the actuarial practices embedded in insurance.

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.