Actuarial skills in securitisation

In previous articles in this series, we introduced securitisation and showed that it is a significant and growing industry in Australia.

We discussed the concepts underlying securitisation, and the parallels with the characteristics of life insurance.

In this article, we will discuss how the actuarial skillset is relevant for securitisation, and how actuaries can contribute to this growing field.

Roles in securitisation

To discuss why actuaries are a good fit for the securitisation industry, it is helpful to first outline some of the tasks required to complete a securitisation transaction, or manage a portfolio of securitisation exposures.

The list below is tailored towards areas of interest for actuaries (the roles of legal counsel, for example, have been mostly omitted):

Role	What it involves
Data analytics	Use asset-level data to uncover trends and improve deal transparency
Credit analysis	Evaluate borrower profiles, asset quality and pool performance
Risk modelling	Build models to simulate default, prepayment and loss scenarios both for the underlying pool of assets, and the flow through to the performance of notes. Investigate interest rate risk, liquidity risk, etc.
Deal structuring	Design or analyse note structures, sizes and income streaming for the transaction. Consider deal size, asset eligibility criteria and other commercial factors. Also model how the pool will behave under a default and how it will need to respond so that it maintains its credit status – e.g. percentage of pool that is A Notes.
Quantitative analysis	Develop pricing models and stress tests for securitised instruments potentially with the goal of forming an investment recommendation
Strategy	Advise banks, fund managers and non-bank lenders on securitisation strategy. Communicate clearly to internal and external stakeholders.
Investor relations	Attract investment to the securitisation transaction or engage with issuers to determine the merits of investing in their program.
Regulatory advice	Ensure compliance with APRA, RBA, and Basel frameworks.
Portfolio management	Monitor securitised assets and optimise risk-return profiles. Compare relative tranches and series to determine which is better priced for the risk diversification.

The above roles are typically completed multiple times for any given securitisation transaction. For example, both an originator and a rating agency would likely complete a form of credit analysis. One individual might complete several of these roles depending on the size of the team.

The table below lists some of the relevant parties (again, tailored towards the area’s most of interest to actuaries):

Party	Party’s role
Asset originator / issuer	Originate assets. Engage other parties to complete the transaction. May also lead structuring and modelling.
Arranger	Drives the structuring of the transaction and overall marketing process to sophisticated investors. Usually a bank.
Distributor / Joint Lead Managers (JLMs)	Engage investors to drive demand for the transaction. Typically a bank. May be multiple JLMs on a deal.
Rating agencies	Provide an independent assessment of the riskiness of different notes in the securitisation. Provides a new issuance report and ongoing annual surveillance reports for the transaction.
Auditors	Complete a data quality audit of the underlying asset pool to provide assurance to investors and rating agencies. Typically one of the large accounting firms.
Manager	Complete regular reports for investors following deal settlement. Instruct the Trustee^[1] to operate bank accounts for the SPV. Typically the issuer.
Servicer	Complete customer servicing for the underlying assets. Provide information inputs to the manager for regular reporting. Typically the issuer.
Investors	Purchase notes in the structure in exchange for future cash flows. May sell or purchase notes on the secondary market.

Why actuaries?

We previously discussed the parallels between working with a pool of lives in life insurance and a pool of mortgages in securitisation. You have uncertain decrements and cashflows in both instances that need to be:

measured
quantified in terms of financial impact e.g. NPV based on ‘lives outstanding’ or ‘mortgage principal outstanding’
assessed for what risk factors might impact the decrements
adjusted for the ‘capital’ to manage the variation of the decrement table
managed for other issues such as non-payment for temporary periods (e.g. arrears, premiums etc)
communicated to internal and external stakeholders to inform decision making

On the technical side, this calls for the kind of analytical skills actuaries are known for. Modelling securitisation structures and the asset portfolios which back them requires a deep understanding of how pools of risk behave over time, especially under uncertain conditions. Advanced techniques such as stochastic simulation further enhance this contribution.

But it’s not just about the numbers. Actuaries have skills beyond modelling which position them well to take on leadership opportunities in the industry.

A core part of securitisation is communicating uncertainty. Being able to describe where risk lies and communicate this clearly to a diverse group of stakeholders gives actuaries an edge over other quantitative disciplines. This is critical for attracting investors to a transaction, helping an organisation make an investment decision, or communicating the risks and rewards associated with different structures to management.

Working across disciplines and understanding how legal documentation corresponds to asset behaviour is hugely beneficial in securitisation. Just as actuaries can connect insurance policy documents with the behaviour of the pool, being able to model structures directly from the corresponding documentation can make you indispensable within the securitisation team.

Professional judgement and critical thinking are essential to inform strategic advice on an organisation’s securitisation program.

With the ongoing growth of the securitisation industry in Australia (see the first article in this series) and its expansion into new asset classes (e.g. recent issuances for buy now pay later loans and reverse mortgages) this is an opportune time to consider a career in the industry.

The demand by the industry for skilled structurers, analysts, originators, fund managers, treasurers, rating agencies, banks, regulators – mapped with the continued increase in originations should be fertile ground for actuaries given the key parallels to life insurance skillsets.

In the authors’ own journeys in this field, it has been quite common to meet with origination teams that were assisting the securitisation issuance who had members of the team that were that either actuaries or had actuarial training.

Conclusion

The actuarial skillset, both technical and non-technical, positions us well to pursue a career in the growing Australian securitisation industry. If you wish to learn more, securitisation is covered in the Actuaries Institute’s Banking subject as part of the Fellowship program.

Further market statistics, reference materials and training opportunities are available through the Australian Securitisation Forum website.

And of course, we hope to keep the Actuaries Digital posted with further pieces on this developing industry!

Read Part 1

Read Part 2

Footnotes

^[1] Trustee is the independent entity that legally holds the assets (mortgages etc), collects the cash flows and distributes the payments as instructed by the Manager, operates the Trust (SPV) according to the Trust Deed and enforces the rules as per the Trust Deed.