Matt Attard explores the challenges inherent working in a small island nation, and how curiosity and lateral thinking can help overcome these issues
Working as an actuary in a small market comes with challenges – as is the case in Malta, a small island nation 191km south of Sicily.
Azure beaches and historic bastions aside, Malta is a hotspot for financial services. As well as its local insurance undertakings, Malta is home to operations from several international players. These include large reinsurers and undertakings with managing general agent business, even those with origins within the London market. Malta is also the domicile of around 62 captive (re)insurance undertakings, and the Malta Actuarial Society is a budding organisation that consists of around 52 actuarial and non-actuarial professionals – among them 10 IFoA-qualified members.
The Malta-based actuary’s experience tends to differ depending on whether they are working with local undertakings or with international market participants that are domiciled in Malta. One difference is the context of the actuarial problems. At times, working with international clients requires us to understand a reality that we cannot relate to. An example within the local life context is annuity business, which is yet to propagate in Malta. However, we can refresh our understanding of the concepts from our studies, and overcome the inability to relate to an example through extensive research and a motivation to ask questions.
Working for local undertakings writing risks in Malta, on the other hand, is a unique and enriching experience in itself. It’s always intriguing to do a deep dive into the intricacies of an insurer’s market share for a product, as well as the impact of the actions taken by the limited number of competitors at play.
Overcoming challenges
Data is the lifeblood of any actuarial model, and the scarcity and variability of data in Malta provide a challenge when deriving credible and robust estimates for local undertakings. Malta’s small population generally means that there are a very small number of loss events for actuaries to calibrate models relevant to the Maltese context on. This issue persists through examples such as the absence of a nationwide life table and reserving for large motor liability losses, where data on final court awards may not be prevalent. Variability echoes the ‘law of small numbers’ and its attaching bias of ‘hasty generalisation’. This occurs because we tend to underestimate the true variability within a small sample. Malta’s population is densely connected and heavily clustered, so information tends to spread rapidly. This clustering means our estimates are highly sensitive to changes in the behaviour and experience of one or a number of local clusters. (This was a defining issue that local epidemiologists needed to grapple with when calibrating COVID-19 infection dynamics models for the country.) To address these issues, actuaries in Malta attempt to make adequate assumptions by adjusting the potentially limited available benchmarks, placing the right credibility weighting on own experience, and using lateral thinking.
“The scarcity and variability of data in Malta provide a challenge when deriving credible and robust estimates for local undertakings”
A Malta-based actuary would typically address operational issues such as the concentration of risk inherent in single large risks and counterparties for investment and banking. Local undertakings partly mitigate the former through a mixture of facultative reinsurance and co-insurance programmes, unifying with competitors. Reinsurance capacity is affected by the geographical concentrations of large sums at risk in operations such as fish farming and oil and gas exploration. This means we must make innovative use of captive or cell company insurance undertakings for self-retention and layered reinsurance programmes.
Climate change also poses an interesting challenge for Malta-based actuaries. The country has seen an evident increase in extra-tropical storm frequency and severity, and also faces possible tsunamis. This opens up an interesting avenue in which local geophysicists and actuaries could collaborate, as catastrophic models in Malta are typically only available for earthquake risk. The nature of an island nation means there is a great deal of opportunity for us to connect and synergistically collaborate with actuaries from other island nations, such as Cyprus and Caribbean countries – though we may be geographically distant, our joint realities are similar.
Matt Attard is a manager within KPMG Malta’s Risk Consulting team
Image credit | Getty
