Andrew Smith

Topic: "Technology and Internal Models for Financial Businesses."

Andrew is well known internationally for his portfolio of ground-breaking client assignments and extensive published research in the actuarial field. Having represented the UK twice in the International Mathematical Olympiad, he graduated from Cambridge University in 1990, with a first-class degree in mathematics and a Master of Mathematics postgraduate degree. Over thirty years consulting in the financial services industry, including 15 years as a partner at Deloitte, Andrew has worked in diverse areas, including:

• Use of modern financial techniques to value assets and liabilities consistently with market prices. In the late 1990’s, he published some of the earliest methodologies for market consistent liabilities and market consistent embedded value. His seminal 2004 paper (co-authored with Tim Sheldon) has become the authoritative reference on the subject in a life insurance context.
• Use of economic scenario generators. Andrew made a splash in 1995 by putting algorithms for 5 economic scenario generators into the public domain -together with working source code. More than forty clients around the world license Deloitte’s economic scenario generator software. In addition, Andrew serves a portfolio of clients who develop their own models, as well as providing reviews, quality and integrity checks for simulations provided by third parties.
• Developing techniques in analysis of market and credit risk, and their relation to insurance claim frequency and severity, mortality and customer behaviour. In 2005 Andrew published the “Risk Geographies” technique, now widely used as a powerful tool for accurate risk capital calculations, involving intuitive graphical displays of how risks interact.
• Working with banks, providing structuring advice for financial products to the insurance industry. He has also provided quantitative support for the pricing of exotic derivative structures, both in the dealing room and for audit purposes.
• Playing a leading role in the reform of financial reporting for defined benefit pension schemes. He was a co-author, with Jon Exley and Shyam Mehta of the definitive (but then deeply unpopular) 1997 paper "The Financial Theory of Defined Benefit Pension Schemes", which, as reported in The Economist in 2006, "laid the foundations for a completely new actuarial school."
• Developing innovative numerical methods to implement advanced modelling techniques. Andrew invented saddle point implied volatility expansions now widely used in pricing of options and collateralised debt obligations. He was also one of the first to use replicating portfolios for fast liability projection. Andrew’s 1993 paper to the Rome AFIR convention still sets the standard by which today’s replicating portfolio algorithms are judged.
• Stretching the bounds of investment studies to capture important effects not captured by standard models. An example of this is his work on transaction costs, market impact and financing shocks to help insurers understand the costs and benefits of holding less liquid assets. This has included more exotic structures with embedded options, such as equity release mortgages, commercial real estate development finance, securitised retail and trade receivables. He has developed new methods of quantifying insurance liquidity requirements and the yield premiums available on illiquid assets, with implications for asset valuation, cash flow stress testing, capital requirements and liability valuation.
• Working with many insurers and reinsurers on economic product pricing and shareholder value measurement. He has specialised in the use of economic theory to understand market consistent liability valuation, the pricing of capital usage and the setting of profit targets. His paper “The Cost of Capital for Financial Firms” (with Jon Exley, 2006) is the authoritative reference on this subject.
• Andrew’s expertise has also been required for several projects outside the financial services industry. These have included developing funding plans for the decommissioning of nuclear power stations, Monte Carlo methods for evaluating construction project risk and assessment of student loan contracts.

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 joint 2004 paper “The Cost of Capital for Financial Firms”. His 2001 methodology for constructing risk-free yield curves has been adopted for the published yield curves under Solvency II. His joint paper “Why financial firms can charge for diversifiable risk” won a Casualty Actuarial Society prize in 2003 and underpins much of current thinking on risk margins. In 2008, the Institute of Actuaries awarded Andrew a Finlaison Medal, in recognition of Andrew’s contribution to actuarial science, also awarding a prize for his joint paper “The Modelling of Extreme Market Events”. He continues active service on a number of professional working parties both UK and internationally, having recently produced papers on dependency modelling, the market pricing of liquidity, model risk management and the testing of stochastic models. In 2015, the Institute and Faculty of Actuaries elected Andrew as an Honorary Fellow. He is a spirited critic of actuarial mumbo-jumbo, and is well-known for his ruthless debunking of financial myths. He is frequently quoted in the press, and is widely respected as an entertaining and informative conference speaker.
Andrew is an active volunteer for the Actuarial profession. He has served on many working parties, and is currently a member of the extreme events working party and the model risk working party. He has served as a volunteer tutor for the Society of Actuaries’ asset and liability management course (which Andrew co-led in London, Brussels, Copenhagen, Amsterdam, Chicago and Prague). He has presented technical workshops for many European actuarial associations, and as a volunteer has taught longer courses in Albania, Armenia and Ghana to prepare students for the Institute of Actuaries’ examinations. Andrew acts as a scrutineer for the British Actuarial Journal, the Annals of Actuarial Science and the ASTIN Bulletin.