Presentation For Hku 21.10.2010


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Presentation For Hku 21.10.2010

  1. 1. FOR FAVOUR OF POSTINGPublic LectureValue of Actuary for Management:Effective Communication &Investment Know-how by Mr. C.F. YAM, B.Sc. M.Sc. FSA CFPCM Regional General Manager, Insurance Commonwealth Bank Group, IFS North Asia October 21, 2010 (Thursday) 7:00 p.m. - 8:00 p.m. Rayson Huang Theatre(黃麗松講堂), HKU Tea Reception at 6:30 p.m.About the speakerC.F. Yam is Regional General Manager, Insurance of CommBank Management Consulting, a member ofthe Commonwealth Bank of Australia Group (CBA). C.F. is a qualified actuary with extensive experience inlife, health and general insurance, as well as investment and pension practices. C.F. has held positions aschief financial officer and appointed actuary for both traditional life insurer and bancassurers; and hasstructured asset strategies for life and pension funds. Apart from financial and actuarial roles, C.F. has alsorun operations, group insurance and pension businesses, including third party pension administrationbusiness for major financial institutions in Hong Kong.C.F. was President of the Actuarial Society of Hong Kong in 1997 and has spoken in various actuarial confer-ences organized by the world professional bodies.Graduated with a First Class Honour degree in Bachelor of Science from the University of Hong Kong, C.F.was awarded a Master of Science degree with Distinction by the University of Lancaster in England. He isalso a Fellow of the Society of Actuaries of the U.S., as well as a Certified Financial Planner.AbstractIn this talk, C.F. Yam will give a brief summary on the financial management regime for the life insuranceindustry. He will share his views on how actuaries may add value in this operating environment. With theeffects of ageing population and customer needs for financial guarantees, actuaries may need to furthertheir practical skills to serve the potentially huge annuity market. Use of influential power will becomecritical for the success of actuaries. For online registration, please go to Attendance certificates available to registered participants upon request for the Continuing Professional Development (CPD) Requirements. Visitors please note that the University has limited parking space. If you are driving, please call the Department at 2859 2466 for parking arrangement. Department of Statistics & Actuarial Science All interested are welcome The University of Hong Kong 統 計 及 精 算 學 系 ENQUIRY: 2857 8312,
  2. 2. Value of Actuary for Management :Effective Communication & Investment Know-how University of Hong Kong 21 October 2010C. F. YamRegional General Manager, InsuranceCommonwealth Bank Group, IFS North Asia
  3. 3. Discussions Actuarial Education Developments in Life Insurance Business Value Added Financial Markets Delivery of End Products Art of Communication Actuarial Leadership Implications on Professional Development Closing Remarks 2
  4. 4. Actuarial Education Life Life Principles ; Insurance Pricing Pricing Insurance Commutation Laws & Regulations ; Commutation Factor Factor Tax Annuities Financial Financial Annuities Reporting Reporting Life ActuarialActuarial Life Contingency Contingency Pensions Pensions Investment Investment Survival Survival Model Model General General Risk Risk Insurance Insurance Management Management 3
  5. 5. Developments in Life Insurance Traditional Current Trend Term Insurance Annuities Products Whole of Life Variable Annuities Distribution Agency Bancassurance Local GAAPs IFRS4 (Phase 2) Formulae-based Solvency II Financial Reporting Traditional Market Consistent Embedded Value Embedded Value Modeling Approach Deterministic Stochastic 4
  6. 6. Business Value Added Actuarial Challenge : Management often regards Actuaries as Theoretical & not Practical For Actuaries, what the word “Practical” could easily mean:-  Actuarial Pricing;  Sophisticated Financial Modeling;  Producing financial figures & reconciling financial reports to comply with Laws & Standards;  Risk Management (or/ Risk avoidance & in what form?) For Management, “Practical” has the connotation of Business Value Added Business Value Added : Delivery of End Products by Actuaries ?? 5
  7. 7. Financial Markets Insurance Bank/Investment Bank Whole of Life Bonds Variable Annuities Put/Call Options Solvency I/II Basel II/III Dollar Averaging HedgingRisk Management Focus : Financial Risks (ALM, Asset Risks) Reputation Risk Operational Risk Insurance Risks 6
  8. 8. Delivery of End Products (e.g. Variable Annuity)  Typical Financial Risk Management for the product, if VA management not outsourced :- Asset Liability Security Investment   Risk Management Static Hedging  Trading  Pricing Financial Desks / Asset ALM Dynamic Hedging  Models  Valuation Management Static & Dynamic Hedging  Arm   Financial Reporting Capital Management (Naked)   Capital Planning  Writing a VA is equivalent to a Short Put. Short Put creates Negative Gamma for the non-linear exposure of the underlying security.  Dynamic hedging for a Negative Gamma position leads to Gamma Loss.  The sum of Gamma Losses, till Expiration, is the actual cost of the option (before transaction costs).  Volatility, however, is not constant (per Black-Scholes). Delta hedging will be off without incorporating the effect of Volatility Surface. 7
  9. 9. Delivery of End Products (e.g. Variable Annuity) Technically, we can use (e.g.) • Jump-Diffusion Models • Regime-Switching Models • Stochastic Volatility Models for modeling purposes to value the implications. If Delta-Gamma hedging, plus Vega hedging, what are the product price implications! Continuous dynamic hedging (including use of static or higher degree hedges) will incur transaction costs. Presence of transaction costs and market being incomplete (as relevant hedge vehicles may not be available even we can model them out), which leads to many possible views for proper product management. What is the role of actuaries in VA products! Where Actuarial leadership lies! 8
  10. 10. Art of Communication Actuarial Communication Science Art Logical No Right or Wrong Mathematical Wordy or Pictorial Complex SimpleConditional (Assumptions based) Direct & Clear Deal with Numbers Deal with People Objective Subjective (depending on Communicator’s background, position, thinking, etc) Professional Layman (maybe with different background) Analytical May involve Feeling Brain Quadrant : Blue Brain Quadrant : Red 9
  11. 11. Art of Communication(1) Business Value & = Max (  Different Skills & Covariance of Skill Interactions) &(2) Effective Communication  Max (  Covariance of Skill Interactions) 10
  12. 12. Actuarial Leadership Traditional Current Trend Rule Based Environment Principle Based Environment Modeling Skills Influential Skills Calculator Informative Conservative Margins Dealing with Uncertainties Commoditizing Processes Managing Abstracts Unique Expertise Work with other Financial Experts Static Risk Management Skills Dynamic Risk Management Skills Work on Blue Skills Develop with Red Skills Move from Number Crunching to Effective Communication Move from Financial Reporting to Selling /Convincing 11
  13. 13. Actuarial Leadership Today’s environment (the margins are pretty thin) often provides only a tiny space for feasible business solutions. How to provide real Business Value Added by Actuaries in today’s complex and competitive environment? Business Value Added = Effective Communication Financial Risk (Concentrated) & Insurance Risk (Diversified), thus Risk Management naturally leans towards financial risk management How to stay as an expert on Risk Management (The answer lies on Ownership!) Risk Management (by Actuary) with no in-depth knowledge on investment practices (???) may no longer be relevant in a dynamic risk management environment 12
  14. 14. Implications on Professional Development Actuarial Training on investment management driven ALM is likely become crucial for actuaries to maintain the state of the art in Risk Management ALM may mean Liability Driven Asset Strategy (if passive) or Option management (if active) Option management (rho, delta, gamma & vega) versus Traditional dollar averaging or constant proportion concepts (for rho & delta management) Stochastic (on Stochastic) simulations would reflect that financial risks are naturally non-linear. So choice of using capital (passive) or hedging techniques (active) to address Volatility (ALM)? Gamma & Vega management are key in option management, how to link them into actuarial work Capital markets using Risk Neutral Models (pricing with a risk adjusted rate) versus Insurers using Real World Models (using empirical data to simulate). What implications ? With further integration between insurance and capital markets, what implications to actuaries on product pricing and delivery? 13
  15. 15. Closing Remarks What are the Effects of  Ageing Population (Higher Annuity Needs versus Life Protection) &  Customer Needs (Product Delivery = providing Financial Guarantee/Peace of Mind) on the Insurance Industry (where most actuaries housed) (?) What Role of “Actuary” should take in Product Cycle/Risk Management (?) Who should be responsible for the proper delivery of the on-going Product Promises – Product Marketing/Product Actuarial; Appointed Actuary; CFO; Asset Manager; ALM Risk Manager; Hedging Desk; or by CEO/Board via Risk Management Framework(?) Who has the authority with regards to Ownership/Choices/Delivery of Risk Parameters (Financial Risks versus Business Risks) in the whole Risk Management Framework (?) The likely answer may fall in the Use of Influential Power by Actuaries 14
  16. 16. Closing RemarksUse of Influential Power by Actuaries:- Appreciate real life problems are getting much complex than text book cases Critical thinking to tackle ill-defined situations and problems Ability to understand wider financial market practices for easy communication Able to communicate using recipients language Listen to feedback and appreciate recipients having different experiences, thus views & beliefs Appreciate that Risk is abstract and is in the eyes of beholders Leadership skills against odds At the end of the day, Influencing is soft selling, so you must need to know what you sell, why you sell it, what line you will stand for, what objections you would face, how you would handle them and get the buy-in 15
  17. 17. Thank You 16