Banks and Insurers: Progress Together or Drifting Apart? A Lecture by Andrew D Smith (Deloitte LLP), 17 November 2010

Insurers spent the last decade catching up with pre-crisis banking models, now embedded within insurance practice under the name of “market consistent valuation”.

The reputation of these models as a basis for risk management was severely dented in 2008 when most investment bank dealing rooms lost a great deal of money. Much of the loss came about because banks could neither borrow nor invest free of risk at the rates assumed in their models.

After eighteen months of disarray, banks have got to grips with the links between credit risk, borrowing cost and product pricing. A new pricing methodology consensus has emerged. Insurers find themselves out of step once more, squandering the unique opportunity to learn lessons at banks’ expense.

Andrew Smith explains in simple terms how the pieces fit together. He contrasts insurance and banking approaches, highlighting the mechanisms by which both new insights and misunderstandings spread within financial firms. Finally, he considers the implications for how risk is priced and distributed within the financial services industry.

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Andrew D. Smith, Deloitte LLP

Andrew is well known internationally for his portfolio of ground-breaking client assignments and extensive published research in the actuarial field. He graduated from Cambridge University in 1990, with a first class degree in mathematics. Since joining Deloitte LLP, Andrew has consulted with many clients in diverse areas. Andrew has published many papers in insurance, pensions and financial matters. In 1996 he won the Institute of Actuaries prize for his paper “How actuaries can use financial economics”, another prize in 2002 for his joint paper “Corporate bond models”, and a further prize for his 2004 paper “The cost of capital for financial firms”. In 2008, the Institute of Actuaries awarded Andrew a Finlaison Medal, in recognition of his contribution to actuarial science.

The Worshipful Company of Actuaries (WCA) is a Livery Company of the City of London. Established in 1979, the WCA supports and promotes the actuarial profession. Through its educational and charitable activities, it also brings awareness of the actuarial profession to a wider audience. Its Charitable Trust provides help and support to those in need, with an emphasis on making a difference in improving education, particularly in the area of mathematics. The WCA has broad links with several universities in the United Kingdom, and awards bursaries to students following actuarial science degree programmes.