Editorial - Opportunities for Actuaries In Broader Financial Services

Editorial

Opportunities for Actuaries In Broader Financial Services

By Sim Segal

In recent years, actuaries have experienced an increase in competition. Competitors from other financial services industries are taking positions traditionally held by actuaries. Some have occupied senior positions, including the CFO and CRO roles. Many actuaries perceive this as a threat to the opportunities for actuaries.

To some extent, this is a valid concern. We should take steps to protect our traditional roles in the industry, and we are taking such steps as part of the SOA image campaign.

However, this shift in the competitive landscape may ultimately result in an increase in the opportunities for actuaries. Rather than a one–way encroachment on our territory, this trend appears to represent the beginning of an expansion of the actuarial job market into what the SOA describes as "broader financial services." The term broader financial services refers to the banking industry, the energy sector, and virtually any area in which actuarial skills may be applied.

The end result of various financial service professionals crossing over into each others' realms may well be that actuaries will experience a net gain in job prospects. Why might this be? There are more potential openings for actuaries in broader financial services than there are for non–actuaries in our field. In addition, pioneering actuaries venturing into this new territory are already turning this potential into a rewarding reality.

More Potential Gain Than Loss

While actuaries are losing some positions to non–actuaries, including some senior roles, overall, we should gain more opportunities than we will lose to our competitors.

There are more "broader financial services" jobs that involve skills related to actuarial science than there are actuaries employed today. How many banks are there and how many analysts pricing financial instruments, modeling stochastic capital and performing risk transfer pricing? How many investment banks are there and how many analysts modeling deal structures? How many other industries are there with long–term liabilities and how many analysts projecting future impacts of risk upon the financial results? How many industries are grappling with enterprise risk management and in need of analysts to quantify the potential impacts of risk on their financial results?

There are also more activities that we can perform compared to the number of actuarial activities that can be performed by our competitors. Many broader financial services activities involve mere subsets of the multi–dimensional risks that actuaries routinely manage. For example, we model and manage the interaction of projected movements in assets, lapse rates, early retirement, salary levels, inflation, mortality, longevity, morbidity, etc.—often simultaneously for a given product–over an extremely long projected time horizon. In contrast, most of the broader financial service activities in which we would be interested involve a much more modest set of interactive variables and also a more manageable time horizon. For example, how difficult would it be for an actuary to model and manage the risks involved in a typical banking product like a savings or checking account? In contrast, would a bank analyst or financial engineer have the skills to price most life–or health–contingent insurance products?

Realizing the Potential

Although the potential is there for us to gain more roles than we lose, is this happening? Anecdotal evidence seems to indicate that it has begun, and as the SOA continues efforts to develop this market, we should expect a continued increase in the number of actuaries branching out in this market.

These pioneering actuaries are finding two keys to the successful penetration of these new markets. To successfully cross over into the broader financial services market, actuaries must:

• Identify an appropriate application of actuarial skills.
• Overcome the language barrier.

The first key is to identify an appropriate application of actuarial science to broader financial services. I have been fortunate enough to be involved in several such ventures. Here are three examples from my personal experience:

• Building dynamic value–based management tools for an online bank; this involved techniques similar to embedded value for insurance companies.
• Applying actuarial techniques to sto–chastic retail financial planning for financial planners focused on the retirement market; this involved multiple techniques, including stochastic projections, life–contingencies, probability theory and other general modeling skills.
• Developing a value–based enterprise risk management (ERM) approach for a technology company; this involved capital budgeting theory and techniques similar to embedded value for insurance companies.

While some applications of actuarial science to broader financial services are readily apparent, others are not. Only by sharing our ideas and our successes will we best leverage our capabilities and more quickly penetrate this new market.

The second key is to overcome the language barrier. Other financial services industries have a different set of tools, terminology and culture that impact their approach to risk. Actuaries must take the time to research the particular industry and listen to their professionals discuss the issues they face. This makes it much easier to bridge the gap and effectively communicate how our solutions can address their issues. Once we present our solutions in their language, it does not seem so foreign to them—rather than "actuarial science," it just sounds like a creative solution to their business issues.

Actuaries that identify applications of their skills to other financial services areas and learn to speak in the other profession's language are discovering that we can add new insights through our unique approach to modeling and managing risk.

In the three examples of my experience, once we—the actuarial team—listened carefully to how these professionals approached their business, their risks, and their financial reports and measures, it became much easier to communicate our approach in their terms. I found these experiences invigorating, re–warding and encouraging for the future of the actuarial profession. These atypical customers who were rarely, if ever, direct consumers of actuarial science services, appreciated the unique perspective that we brought to the table and our solutions were well received.

Though other financial services professionals have started to play in our pond, encroaching on some of our traditional opportunities, many actuaries will find that we are able to play in their pond too. In the end, we will have gained at least as many non–traditional opportunities as we have yielded in our traditional field of play.

Come on in. The water's fine.