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P&C Actuaries in Derivatives* Pricing
By Erica W. Szeto, FCAS, Candidate Liaison Committee
New York - About a year ago, when Converium announced the run-off of their North American operations, Maria Morrill, ACAS, sat at her desk in their finite reinsurance pricing division and called a recruiter.
"The recruiter sent me a list of jobs and a financial modeling position at Munich American Capital Markets (MACM) caught my eye." Morrill admits that at the time, she had little knowledge of finance or derivatives - she had not even sat for CAS Exam 8 on finance yet. What Morrill was most attracted to was the nontraditional nature of the actuarial opportunity.
MACM, an affiliate of reinsurance giant Munich Re, assumes risk via financial derivatives on portfolios of risks. Examples of these structures include weather derivatives, portfolios of project finance loans, asset-backed securities, and media and entertainment financings. "Many reinsurance companies are now positioning themselves to transfer insurance risk via the capital markets," Morrill said, "and Munich Re is one of them."
MACM was looking for someone with an actuarial pricing background to model the risk-return expectations and profit-loss distributions of various capital markets transactions. The results of the analysis would be used in deciding in which deals to participate.
Morrill's reinsurance pricing experience and problem solving skills proved to be valuable assets. "The models I used to price finite reinsurance risks are actually quite similar to the models I'm now using to evaluate these capital markets transactions. The only difference is that I model the behavior of assets rather than liabilities."
Morrill holds a Ph.D. in mathematics from UCLA, and spent six years teaching at the College of the Holy Cross in Worcester, Massachusetts before joining the actuarial profession, but claims that her new job does not necessarily require that level of academic achievement. "There's a lot of problem solving involved, a skill I would venture to say most actuaries have. I am constantly thinking about the best way to model an underlying process - that process might be the default behavior of an asset-backed security as opposed to the insurance claims-paying process that a traditional actuary might model." The models she builds are in Excel, using VBA to run Monte-Carlo simulations. When asked about the greatest difference she has come across in her transition from the insurance market to the capital markets, Morrill jokes, "Underwriters don't take me out drinking anymore!" Morrill claims that the transition has not been painful at all - there are many parallels between the two markets that have made her transition relatively easy.
"At MACM," she explains, "the client liaison is called a structurer, who functions like an underwriter for capital markets deals." Morrill works closely with the structurers, similar to her reinsurance pricing days when she worked regularly with the underwriters.
"Actually, the greatest challenge was getting up to speed with regard to deal terminology," Morrill said, "We meet with counterparties and clients, and getting familiar and conversant with the lingo of finance and derivatives was the number one challenge."
Morrill continues to be excited about her new position at MACM. She appreciates the opportunity to continuously learn new things and be able to participate in a variety of unique transactions, such as modeling the cash flows of financing pools for major motion picture movie studios. "I really like the idea of having an arsenal of actuarial tools, which can be coupled with the tools developed for capital markets and bringing it all to bear on the financial markets opportunities," Morrill says.
The work environment at MACM is relatively sane. Morrill sometimes works long hours, but claims not as much as consultants or investment bankers. MACM fully supports her pursuit of Fellowship with the CAS. Morrill currently reports to the head of the Structured Products group, who has a background in economics and risk management. Morrill is currently the only actuary in her group, but has opportunities to interact with actuaries at Munich Re and the Munich Re subsidiary, American Re.
As the popularity for reinsurance companies to transfer risk to the capital markets increases, Morrill expects to see more opportunities for actuaries to grow into this field. "It is in our best interest as actuaries to claim all areas of work where the actuarial skill set can be utilized and add value. We should keep an open mind when it comes to categorizing jobs as being actuarial or not."
*Derivatives are financial instruments whose promised payoffs are dependent on the value or occurence of something else (called the underlying).